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Full Text of Decision

34015SERVICE DATE – November 6, 2003

EB

This decision will be printed in the bound volumes of

the STB printed reports at a later date.

SURFACE TRANSPORTATION BOARD

CORRECTED DECISION

STB Docket No. 42069

DUKE ENERGY CORPORATION

v.

NORFOLK SOUTHERN RAILWAY COMPANY

Decided: November 5, 2003

The Board finds that the complainant has failed to establish that the challenged
rates (for transportation over which the defendant railroad concedes that it has
market dominance) are unreasonably high.

By complaint filed on December 19, 2001, Duke Energy Corporation (Duke) challenges
the rates charged by Norfolk Southern Railway Company (NS) for the movement of coal from
origins in Virginia, West Virginia, and Kentucky to Duke’s Allen, Belews Creek, Buck, and Dan
River electricity generating facilities in North Carolina. Duke asks the Board to prescribe the
maximum reasonable rates for this transportation, to award reparations for any unreasonable
portions of the charges collected by NS since January 1, 2002, together with interest, and to order
NS to reimburse Duke for the filing fee for its complaint. Upon considering the administrative
record, the Board finds that Duke has not demonstrated that the challenged rates are
unreasonable, and finds that further proceedings on whether the rate violates the phasing
constraint may be appropriate.

OVERVIEW

As with all maximum rate cases decided using the stand-alone cost (SAC) methodology,
this decision is the product of the particular record that was developed by the parties to the case.
The record in this cases was extensive, and was sufficient for the Board to issue this decision
finding that the rates charged were not shown to be unreasonable under that test.

This is the first modern SAC case east of the Mississippi River. The relative expense to
build transportation projects in the mountainous areas of the Eastern United States compared to
projects located primarily in less mountainous areas of the West may have been a factor in this
case. It may well be that it is more expensive to build in this part of the East, and the question of
whether Duke could have presented a case that could overcome the expense inherent in building
in this part of the country cannot be determined. However, in certain areas of the SAC
presentation in this case, a more robust record could have been developed. For example, the
Board could not use Duke’s operating plan for the stand-alone railroad (SARR) because that
plan, even after careful analysis, was unworkable. As a result, the Board had to adopt NS’s
operating plan for the SARR which, at a minimum, would ensure that the shippers that would
rely on the SARR would receive the service they need. However, adopting NS’s operating plan
resulted in the SARR needing to incur additional costs for locomotives, crews, and track, thereby
significantly increasing the costs to construct and to operate the SARR.

Under the Staggers Rail Act of 1980, railroads were given considerable freedom to
employ demand-based differential pricing provided that such rates were reasonable, and in this
case, under the SAC analysis the rates charged were reasonable. However, the Board may
review the rates charged to “captive” shippers (i.e., those over whom a railroad has “market
dominance”) in a number of different ways, and questions whether the shipper in this instance
should have to incur rate increases of the magnitude imposed here so abruptly. Therefore, should
Duke wish to pursue this matter, the Board will afford the parties an opportunity to address
whether the magnitude of the rate increases at issue here violated the Board’s phasing constraint
and, if so, what method should be used for phasing in these rate increases over time.

PRELIMINARY CLAIM

Separate from its argument that the challenged rates violate the Board’s SAC constraint,
Duke also argues that these rate increases violate a condition imposed by the Board on its
approval of NS’s acquisition (together with CSX Transportation, Inc., or CSXT) of the
Consolidated Rail Corporation (Conrail), in which the Board directed NS and CSXT to adhere to
the representations they had made during the course of that proceeding.
Duke contends that NS
had represented that captive shippers would not be burdened with the costs associated with that
acquisition, but that following the acquisition NS nevertheless embarked upon a program to meet
unanticipated cash needs by increasing the rates of its captive coal shippers, including Duke.
According to Duke, NS has thus reneged on a pledge to the Board that it would not squeeze its
captive shippers if its financial aspirations for Conrail went awry.

In support of its claim that the representations condition precludes significant rate
increases, Duke cites a colloquy between then-Chairman Morgan and NS’s Chief Executive
Officer at the oral argument held by the Board on June 3, 1998:

CHAIRMAN: One last question. You will hear today concern from shippers that
the financial arrangements associated with [the acquisition of Conrail] will cause
rates to go up. Will you need to raise your rates particularly as it relates to captive
shippers? If this merger is approved?

MR. GOODE: We believe, and our studies and projections tell us, that we will be
able to achieve the benefits from this in such a way that it’s a very good
transaction financially for our shareholders and it pays off very well. And we
have not assumed that we will be increasing any rates in order to do that.

NS maintains that the Conrail acquisition was not a factor in its setting of the rates at
issue here, nor the cause of NS’s current inadequate revenues. NS cites declines in recent years
in certain lines of its business as a significant factor in its decision to look to relatively demand-inelastic shippers such as Duke for a greater revenue contribution. NS points to a recent
slackening of demand across a number of its lines of business, most notably a large decline in
NS’s export coal traffic caused by what it characterizes as profound changes in the world coal
markets over the course of the last decade. NS states that its annual export coal tonnage declined
from 24 million tons in 1998 to 11.6 million tons in 2001, and that its revenues from this traffic
declined by an even greater percentage, from $301 million in 1998 to $129 million in 2001. NS
also notes that it has experienced recent declines in its movements of kaolin clay, paper products,
and metals. NS maintains that these traffic declines occurred for reasons totally unrelated to its
Conrail acquisition and would have occurred even if that acquisition had not taken place.

The market in which NS operates, like that of most businesses, is a fluid one that requires
constant adjustment to changing market conditions. NS has explained that changes in its traffic,
which are unrelated to its acquisition of Conrail, caused it to reevaluate the rates being charged to
a variety of its customers, including Duke. In addition, Duke has facilities that are competitively
served as well as singly-served, and it appears from the record that the dispute which led to this
case reflects the unbundling of the rates to the two kinds of plants.

The Board has no evidence, and Duke has presented none here, to suggest that the rate
increases imposed on Duke were necessitated by NS’s acquisition of Conrail. While the Board
would be concerned if evidence in this record supported such allegations, the Board cannot take
remedial action solely on the basis of Duke’s unsupported allegation. In any event, the Board’s
representations condition in Conrail was not, and could not have been, meant to freeze NS’s
then-existing rates indefinitely, depriving the carrier of the ability to adjust its rates to react to
changing market conditions.
Therefore, Duke’s claim is rejected.

MARKET DOMINANCE

The reasonableness of a challenged rail rate can be considered only if the carrier has
market dominance over the traffic involved. 49 U.S.C. 10701(d)(1), 10707(b), (c). Market
dominance is “an absence of effective competition from other carriers or modes of transportation
for the transportation to which a rate applies.” 49 U.S.C. 10707(a).
Here, NS concedes that it
possesses market dominance over the traffic at issue.

RATE REASONABLENESS STANDARDS

A. Constrained Market Pricing

The Board’s standards for judging the reasonableness of rail freight rates are set forth in
Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520 (1985) (Guidelines), aff’d sub nom.Consolidated Rail Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987). These guidelines
impose a set of pricing principles known as “constrained market pricing” (CMP).
They contain
three main constraints on the extent to which a railroad may charge differentially higher rates on
captive traffic: revenue adequacy,
management efficiency,
and the stand-alone cost test.
A
fourth constraint—phasing—can be used to limit the introduction of otherwise-permissible rate
increases when necessary for the greater public good.

The revenue adequacy and management efficiency constraints employ a “top-down”
approach, examining the incumbent carrier’s existing operations. If the carrier is revenue
adequate (earning sufficient funds to cover its costs and provide a fair return on its investment),
or would be revenue adequate after eliminating unnecessary costs from specifically identified
inefficiencies in its operations, the complaining shipper may be entitled to rate relief.
In
contrast, the SAC constraint uses a “bottom-up” approach, calculating the revenue requirements
that a hypothetical new, optimally efficient carrier would need in order to provide rail service to
the complaining shipper. Duke has chosen to proceed here using the SAC test.

B. SAC Test

A SAC analysis seeks to determine the lowest cost at which a hypothetical, optimally
efficient carrier could provide the service at issue free from any costs associated with
inefficiencies or cross-subsidization of other traffic. A stand-alone railroad is hypothesized that
could serve the traffic if the rail industry were free of barriers to entry or exit. (It is such barriers
that can make it possible for railroads to engage in monopoly pricing absent regulatory
constraint.) Under the SAC constraint, the rate at issue cannot be higher than what the SARR
would need to charge to serve the complaining shipper while fully covering all of its costs,
including a reasonable return on investment.

To make a SAC presentation, a shipper designs a SARR specifically tailored to serve an
identified traffic group, using the optimum physical plant or rail system needed for that traffic.
Based on the traffic group, services to be provided, and terrain traversed, a detailed operating
plan must be developed to define further the physical plant that would be needed for the SARR.

Among other things, the operating plan must identify the number of trains, train
characteristics (such as number of cars per train, locomotive consists, and locomotive and car
cycle times), and the number of operating personnel required.
It also must be capable of
providing the service required by the SARR’s customers. Once an operating plan is developed
that would accommodate the traffic group that is assumed, the system-wide investment
requirements and operating expense requirements (including such expenses as locomotive and
car leasing, personnel, material and supplies, and administrative and overhead costs) can be
estimated. (The parties must provide appropriate documentation to support their estimates.) The
operating plan is thus a crucial factor in determining both the total investment that would be
needed and the annual operating costs that would be incurred by the SARR.

It is assumed that investments normally would be made prior to the start of service and
that recovery of the investments would occur over the economic life of the assets.
A
computerized discounted cash flow (DCF) model simulates how the SARR would likely recover
its capital investments, taking into account inflation, Federal and state tax liabilities, and a
reasonable rate of return. The annual revenues required to recover the SARR’s capital costs are
combined with the annual operating costs to calculate the total annual revenue requirements.

The revenue requirements of the SARR are then compared to the revenues that the SARR
could expect to receive from the traffic group that it is designed to serve. Absent better evidence,
the revenue contributions from non-issue traffic are based on the revenues produced by the
current rates (and where the traffic would be interlined with another carrier, the extent of the
SARR’s participation in the movement).
Traffic and rate level trends for that traffic group are
forecast into the future to determine the future revenue contributions from that traffic.

By comparing the total costs of the stand-alone system to the total revenues that would be
available to the SARR over the full analysis period (usually, as here, a 20-year period), it can be
determined whether there would be over- or under-recovery of costs. Because the analysis period
is lengthy, a present value analysis is used that takes into account the time value of money,
netting annual over-recovery and under-recovery as of a common point in time. If the sum of the
present values of over-recoveries does not exceed that of under-recoveries, the existing rate
levels are not considered to be unreasonable under the SAC constraint.

C. Proper Role of Rebuttal Evidence

The proper scope of permissible rebuttal evidence in SAC rate cases has been addressed
in various prior decisions. In General Procedures for Presenting Evidence in Stand-Alone Rate
Cases, STB Ex Parte. No. 347 (Sub-No. 3) (STB served Mar. 12, 2001) at 5, the Board reminded
parties to SAC cases that the party with the burden of proof—i.e., the shipper on SAC issues
—
must present its full case-in-chief in its opening evidence. The Board cautioned parties about the
consequences of new evidence being improperly presented on rebuttal. Id.

Nevertheless, the scope of evidentiary issues that may be raised on rebuttal remains a
continuing source of controversy in SAC cases. In recent cases, the Board has sought to clarify
the parameters around this issue. In Texas Municipal Power Agy. v. Burlington N.&S.F. Ry.,
STB Docket No. 42056 (STB served Mar. 24, 2003) (TMPA), for example, the Board (at 107)
rejected rebuttal evidence on certain maintenance-of-way expenses, in part, because essentially a
new case was offered on that issue on rebuttal, depriving the defendant railroad of an opportunity
to address the validity of the revised presentation. Similarly, in Duke Energy Corp. v. CSX
Transp., Inc., STB Docket No. 42070 (STB served Mar. 25, 2003), the Board explained that the
proper procedure for seeking to introduce a potentially significant redesign of the SARR is to file
a petition to supplement the evidentiary record.

In this case as well, there continue to be charges that portions of the rebuttal evidence go
beyond the permissible bounds of rebuttal, reflecting some apparent uncertainty by both parties
as to where those boundaries lie. The appendices to this decision describe the evidentiary issues
that have been raised in this case as well as the resolution of those issues. However, the chronic
nature of these types of disputes means that further refinement and clarification must be provided
here regarding this issue.

As to disputed issues, where the shipper’s opening evidence is feasible and supported, it
is used in the Board’s SAC analysis. However, where on reply the railroad both (a) demonstrates
that what the shipper presented is infeasible and/or unsupported and (b) offers feasible, realistic
alternative evidence that avoids the infirmities in the shipper’s evidence and that is itself
supported, the Board will use the reply evidence for its SAC analysis.

On rebuttal, as to those issues challenged by the railroad,
the shipper may demonstrate
that its opening evidence was feasible and supported, it may adopt the railroad’s evidence, or in
certain circumstances it may offer to refine its evidence to address issues raised by the railroad
regarding its opening evidence. Where the railroad has identified flaws in the shipper’s evidence
but has not provided evidence that can be used in the Board’s SAC analysis, or where the shipper
shows that the railroad’s reply evidence is itself unsupported, infeasible or unrealistic,
the
shipper may supply corrective evidence. However, a shipper is not free on rebuttal to
significantly redesign its SARR or alter the core assumptions upon which its case-in-chief is
based without filing a separate petition to supplement the evidentiary record.

This standard balances the interests of both shippers and railroads, as well as the public
interest in having rail rate regulation founded on an analysis that is realistic and supported and
will help achieve the ultimate goal of the SAC process: a proper evaluation of whether the rate
being charged is reasonable. Under this standard, the shipper must plan to submit its best, least-cost, fully supported case on opening. It may not hold back to see the railroad’s reply evidence
before finalizing or supporting its own case, as an opportunity to correct deficiencies in its
opening evidence is not assured. On the other hand, a railroad may not take unfair advantage of
weaknesses in the shipper’s opening evidence by submitting reply evidence that is itself
unsupported, infeasible, or unrealistic, or that presents criticism without appropriate evidence
that can be used in the Board’s SAC analysis.
If it does, the shipper may use rebuttal to correct
deficiencies that have been identified. Thus, it is the nature and quality of both the opening and
reply evidence that determines the extent to which rebuttal evidence may be considered.

STAND-ALONE COST ANALYSIS

Duke designed a hypothetical SARR called the Appalachia & Carolina Central Railroad
(ACC) to serve a selected traffic group. That traffic group consists of coal traffic that NS
currently moves from 39 mines in the Central Appalachian region,
as well as certain grain
traffic currently handled by NS that moves through this region. The ACC was designed to handle
approximately 88 million tons of coal and grain traffic.

A. ACC Configuration

The ACC would replicate approximately 1,100 miles of existing NS lines extending
from Kenova (in southwest West Virginia, on the Ohio River) to Duke’s Allen coal-fired
electricity generating facility, just south of Belmont, NC. Proceeding from north to south, the
ACC’s main line would start at Kenova and proceed in a southeasterly direction to Bluefield,
WV, via Naugatuck, Devon, and Iaeger, WV; continue east to West Roanoke, VA; then turn
south to Winston-Salem, Charlotte, and Belmont, NC. The ACC would have two secondary
main lines and numerous branch lines to serve mines in Central Appalachia and Duke’s five
coal-fired electricity generating facilities in North Carolina.

A map and a more detailed description of the ACC’s configuration is contained in
Appendix A. That appendix also contains the Board’s resolution of evidentiary disputes
regarding the amount of track that would be needed for the ACC to operate this system.

B. ACC Traffic

Most of the traffic moving over the ACC (approximately 95%) would be coal from
Central Appalachian mines; the remainder would be overhead grain traffic that the ACC would
receive from the “residual NS” at Kenova and return to the residual NS at West Roanoke.
The
ACC would originate almost all of the coal that it would handle, although it would receive some
coal from NS via interchange at Appalachia, VA, the western terminus of the ACC. The ACC
would serve five Duke power plants in North Carolina,
as well as two non-Duke power plants,
a major manufacturer,
and two barge transload facilities on the Ohio River. The vast majority
of the traffic moving over the ACC (79%), however, would be interchanged with the residual NS
at seven locations along its route: Kenova and Alloy, WV; Appalachia, St. Paul, and West
Roanoke, VA; and Winston-Salem and Charlotte, NC.

With respect to the traffic that would be handled by the ACC, the parties disagree on: the
amount of traffic and revenues that the ACC traffic group would generate; what portion of those
revenues the ACC would receive from “cross-over” traffic (i.e. traffic for which the ACC would
not replicate the full length of NS’s current move but would instead interchange with the residual
NS); and whether it is appropriate to assume that the ACC could route cross-over traffic
differently from how that traffic currently moves without factoring in additional off-SARR costs
that would be incurred by the residual NS for its portion of interlined movements as a result of
the different routings.

1. Tonnage and Revenues

The annual tonnage and revenues for the traffic included in the ACC traffic group are
addressed in Appendix B. As discussed there, for projecting future tonnage and revenues for
this traffic, the Board generally relies on the most recent coal tonnage and revenue projections for
the Central Appalachian region obtained from the Energy Information Administration (EIA), a
statistical arm of the Department of Energy charged with providing policy-neutral data and
forecasts.

2. Revenue Divisions

The majority (almost 80%) of the ACC traffic group would be cross-over traffic. Thus,
an important part of determining the revenues that the ACC would receive is computing what
portion of the revenues from cross-over traffic would go to the ACC and what portion to the
residual NS. In recent SAC cases the Board has accepted, for lack of better evidence, various
parties’ use of a “modified mileage block prorate” approach (the “Block Methodology”) as the
formula for allocating cross-over traffic revenues.
(Under the “Block Methodology,” each
carrier is assigned one “block” for every 100 miles or part thereof that it carries the traffic, plus
an additional block for originating or terminating the traffic; the total revenues are then allocated
based on each carrier’s share of the total number of blocks.) The Board has long recognized,
however, that this methodology may not work in all cases, and it has been open to suggestions
for other methods to allocate cross-over revenues.
Duke advocates continued use of the Block
Methodology here. NS argues that the Block Methodology is seriously flawed, and it advocates a
different approach.

As discussed below, the Board has first considered the more general question posed by
NS of whether divisions should be based on a market-based or a cost-based inquiry, and
concluded that a market-based inquiry is not appropriate for a SAC analysis. The Board has also
considered NS’s proposed methodology for allocating revenues here—a formula purporting to
account for relative variable costs, distances, and densities—and concluded that NS has not
adequately supported that formula. Finally, the Board has considered mileage-based approaches
and concluded that the Block Methodology has inherent shortcomings, and that a modified,
straight-mileage approach should be used instead.

a. Divisions Based on Market Power

NS argues that the ACC would have little bargaining leverage over the residual NS and
thus revenue divisions derived from the Block Methodology would not reflect market realities.
NS reasons that, because both the residual NS and CSXT would provide competition to the ACC
from other Central Appalachian coal origins, the residual NS, as the bottleneck carrier at the
destinations of these movements, could exert bargaining leverage that would drive the ACC’s
revenue division on cross-over traffic down close to variable cost levels.

As the following example illustrates, however, NS’s market power analysis is not
appropriate for determining cross-over traffic revenue allocations in a SAC analysis.
Assume,
as depicted in Figure 1 below, that a defendant railroad carries two large coal movements from
the same coal mine to two captive shippers, but that another railroad can haul the coal from the
mine to a mid-way interchange point. Thus, the defendant has a bottleneck over half of each
movement. Assume also that the complaining shipper includes the traffic of the other shipper in
the traffic group for its SAC analysis.

Figure 1

(See PDF file for image.)

The complaining shipper would rightly argue that it should not alone bear the cost of the
competitive segment (c-d), but rather that the other shipper sharing those facilities should
contribute as well. But if the Board were to engage in NS’s analysis of relative bargaining
power, the complaining shipper would have to pay most of the fixed costs of the competitive
segment itself. That is because, if a SARR replicated the defendant railroad from plant to mine
(a-d), but left the residual railroad with the bottleneck segment for the non-complaint traffic (b-c), NS’s analysis would give the bulk of cross-over revenue from the other captive shipper to the
bottleneck residual railroad.

There is, however, no good reason why the other captive shipper should not be expected
to contribute to both the bottleneck and competitive segments in the example above. Moreover,
if that captive shipper were to file its own rate complaint and include the first shipper in its traffic
group, NS’s approach would have each captive shipper bear most of the fixed cost of the
competitive segment by itself. The end result would deprive each complaining shipper of the
benefit of grouping traffic (i.e., realizing the economies of scale, scope, and density) held out to
them in Guidelines, 1 I.C.C.2d at 544.

Thus, a debate over how much of the revenues from cross-over traffic the hypothetical
carrier could negotiate with the residual defendant has no place in a SAC analysis. (Indeed, the
defendant carrier does not negotiate with itself as to whether one segment of its line should be
allocated a larger share of the revenues from a movement than another segment of its own line.)
Rather, the revenue allocation issue should reflect, to the extent practicable, the defendant
carrier’s relative costs of providing service over the two segments.

b. Density Methodology

NS further notes that the economies associated with the high-density lines leading into the
Central Appalachian coal mines are made possible by a far-flung delivery network of light-density lines. NS argues that applying a mileage-based revenue allocation formula in this case
would enable the complainant to capture the benefits associated with the higher density lines
without reflecting the costs associated with NS’s lower density delivery network. To address this
concern, NS suggests using an alternative revenue allocation approach referred to here as the
“Density Methodology.”

The premise of NS’s proposal is that proportionately more revenues should be allocated
to lighter density lines because (all other factors being equal) they would have higher average
total costs.
Under NS’s proposed Density Methodology, the variable cost for each carrier’s
segment of the movement would need to be calculated, as well as the total available contribution
to fixed costs (the total revenues less total variable cost for both segments); revenues would then
be allocated between the two carriers in proportion to each segment’s relative variable cost,
distance, and density.
Thus, the longer the residual NS would carry the traffic and the lighter
the density of the residual NS tracks used, the more revenue would be attributed to the residual
NS.

NS’s proposed formula contains the critical assumption that light-density lines have the
same fixed costs per mile as heavy-density lines
—an assumption that Duke challenges here. If
the fixed costs per mile are not roughly the same, then NS’s methodology could allocate too
much revenue to the light-density lines. If the amount of fixed costs required is roughly
proportional to the amount of traffic that would move over that line, then NS’s complicated
formula would collapse to a simple mileage division.

But there is no evidence that fixed costs per mile are the same for the ACC’s segment of
any move as they are for the residual NS’s. By definition, fixed costs are those costs that do not
vary with output and would include investments in land, tunnels, track, and bridges. But this
does not mean that the fixed investment costs are the same for light- and heavy-density lines.
The fixed investments required for a superhighway are not the same as the fixed investments
needed for a country road. The two roads may share certain basic investments, but it would be
implausible to just assume that total fixed investment would not depend on the expected use of a
road or, in this case, a rail line.

There may be merit to allocating revenues based on the relative variable cost and average
fixed cost to haul the traffic over each segment of the move, if those costs can be fairly
approximated. But NS has not shown how its proposed formula would account for differences in
fixed costs per mile. NS has provided no evidence that its per-mile capital investments in the
Central Appalachian region are identical to its per-mile capital investments along its lower-density delivery network. This deficiency strikes at the heart of NS’s proposed methodology, and
thus the Board will not adopt it.

c. Mileage-Based Methodology

In the absence of a better supported method, the Board is left to continue to apply a
mileage-based approach, which clearly bears some relationship to the relative total costs NS
incurs to provide service over each segment. There remains a question, however, as to whether
the Block Methodology is the most appropriate mileage-based approach to use in a SAC analysis.
The Board’s concern is that the Block Methodology leads the parties to design SARRs to take
advantage of its revenue allocation, rather than produce the fairest division between the carriers.

An attractive feature of NS’s Density Methodology is that it assures that a carrier receives
some incremental revenue for each additional mile that it would move the traffic—a feature not
shared by the Block Methodology. As illustrated below, the Block Methodology allocates
revenue in a “lumpy” manner.
For example, assuming a 550-mile cross-over movement, under
the Block Methodology the SARR would first receive 13% of the total revenues for originating
the traffic. But then, for hauling that movement only 1 mile from the coal mine, the SARR
would be allocated another 9% of the revenue, for a total of 22%. The SARR would not get
another penny if it were to carry the traffic another 48 miles. But if its portion of the movement
were 50 to 100 miles, the SARR’s share of the revenues would jump to 25%; if it were from 101
to 149 miles, the SARR would receive 33%; and so on.
(The total number of blocks to be
shared by the two carriers fluctuates, changing every 50 miles as the number of blocks credited to
either carrier changes.) Figure 2 below illustrates the entire sequence:

Figure 2: The Block Methodology

(See PDF file for image.)

The lumpy nature of the Block Methodology could artificially drive the selection of the
SARR’s configuration. A complainant may find itself in the enticing position in which, by
extending the SARR only a few miles, the SARR may obtain another block of the revenues and
disproportionately increase the SARR’s portion of revenues relative to the additional investment
costs and operating expenses associated with the added miles. Alternatively, a complainant may
be reluctant to extend a SARR as far as it otherwise might if no additional revenues would be
forthcoming from cross-over traffic.

As a result of these deficiencies, it is appropriate to modify the Block Methodology here,
and a “Modified Straight-Mileage Prorate” (MSP) will be used instead. Under that approach,
revenue from cross-over traffic is allocated based on the total mileage hauled by the SARR and
the residual carrier, while retaining a 100-mile additive for originating or terminating the traffic.
In other words, the revenue division for the SARR would equal [miles carried by the SARR plus
a 100-mile originating and/or terminating additive] divided by [the total distance plus 200 miles].
Figure 3 below depicts the difference between the two approaches:

Figure 3: MSP & Block Methodologies

(See PDF file for image.)

The only difference between the two approaches is that the lumps in the Block
Methodology have been smoothed out. Using the same 550-mile cross-over movement example,
both approaches would give the SARR 13% of the cross-over revenue for originating the traffic.
But rather than allocating 9% more revenue for the first mile, and no more for the next 48 miles,
the MSP Methodology would allocate roughly 0.135% of the revenue to each mile. In contrast to
the choppy Block Methodology (as illustrated in Figure 2), the MSP Methodology should better
approximate the relative costs the defendant railroad incurs to haul this traffic over each of the
segments, by applying the reasonable assumption that average total costs are a continuous
function of distance.
Furthermore, this change removes the “gaming” incentive created by the
lumpy nature of the Block Methodology.

3. Rerouting of Traffic

This is the second SAC case in which a complainant has sought to reroute traffic in a
manner that would change the routing on the residual carrier. In the first case, TMPA, the Board
addressed a shipper’s efforts to reroute onto a SARR traffic that was being carried over a
different route. Such rerouting presents a difficult issue that the Board must further refine and
clarify here.

a. General Principles

The SAC test is designed to measure the costs of serving traffic in the absence of
inefficiencies or cross-subsidies. Inefficiencies can take many forms, including inefficiencies
due to a carrier’s physical plant. SeeGuidelines, 1 I.C.C.2d at 537. An existing carrier’s route
structure—which can be the product of a series of line constructions, mergers or line
acquisitions, and line abandonments occurring over the course of many years—may be less than
optimal. It might be more efficient to site a line differently or to eliminate redundant routes.
Therefore, as a general matter, a SARR is not required to use either the configuration or routing
of the defendant carrier, as rerouting can be an appropriate means of removing inefficiencies
from a system.

Concerns may be raised, however, when a rerouting involves cross-over traffic (traffic for
which the ACC would not replicate the full length of NS’s current move but would instead
interchange with the residual NS), as the SARR would not receive all of the revenues or incur all
of the operational and investment costs of serving that traffic. In such a situation, the rerouting
may not be designed to address an inefficiency in the defendant’s operations. Rather, the
rerouting could be designed to shift a greater share of the revenues from the movement onto the
SARR and/or to shift costs of serving that traffic off of the SARR onto the residual railroad.
The Board must look at each proposed rerouting to ensure that it is permissible and consistent
with SAC principles.

As the Board held in TMPA, if a complainant wishes to reroute traffic in its SAC
presentation without having the SARR operate over all of the rerouted portion of the move, it
must ensure that the combined operations of the SARR and the residual carrier would be at least
as efficient as the existing operations. At a minimum, the complainant must fully account for all
of the ramifications of requiring the residual carrier to alter its handling of the traffic and any
changes in the level of service received by the shippers.

The starting point for the Board’s analysis for rerouted traffic will be length of haul. If a
rerouting shortens the distance, the Board will presume it is acceptable, unless the defendant
railroad demonstrates otherwise. The presumption will change for reroutings that result in a
longer overall haul. A longer route is not necessarily less efficient, as increased densities and
other operational efficiencies may offset the additional distance-related costs. But a logical
presumption is that longer routes are generally less efficient than shorter ones; and the greater the
disparity in distance, the stronger that presumption.

b. Application to This Case

In this case, Duke has proposed to reroute certain traffic, thereby increasing the ACC’s
earnings from that traffic. NS objected to the rerouting of approximately 13 million tons per year
of cross-over traffic (comprising approximately 15% of the total ACC traffic) that Duke would
have had the ACC interchange with the residual NS at hypothetical interchanges not along the
usual NS route for the traffic.
Most of this traffic would have been rerouted over the ACC’s
Bluefield-to-Belmont line, rather than NS’s normal route through St. Paul or Appalachia
(interchange points for the ACC with the residual NS on “the Wentz line,”
which is the line
over which NS currently routes that southbound traffic). According to NS, in almost every
instance the rerouting would have been significantly longer—both from the mine to the
interchange point and from the interchange point to destination—than the current NS routing.

NS cited the example of a movement from the Pardee mine (located near the western end
of the Wentz line) to Krannert, GA. NS’s current route is 314 miles, while the combined
ACC/residual NS movement with the rerouting would have been 759 miles. (The map below
shows NS’s current route and the proposed reroute.)

(See PDF file for image.)

Reroutings of this magnitude (more than doubling the total length of the movement)
would clearly impact both carriers’ revenues, investment costs and operating costs, and affect
their operational considerations. Yet in its case-in-chief Duke made no attempt to address the
ramifications of the reroutings.

The most readily measurable impact would have been on the portion of the revenues that
each carrier (the SARR and the residual NS) would have been deemed to receive for its portion
of the joint-line service.
In the example cited, NS stated that, using NS’s current route, the
ACC would take the traffic only 5 miles, while the residual NS’s length of haul would be 309
miles. Under Duke’s “modified mileage block prorate” method of allocating revenues, the ACC
would receive 29% of the revenue, while the residual NS would receive a 71% share using NS’s
current route. But with the reroute, the ACC would have increased its length of haul to 424 miles
and its share of the revenue to 55%, while the residual NS’s length of haul would have increased
to 335 miles but its share of the revenue would have dropped to 45%.
Thus, although the
residual NS would have had a longer haul as a result of the rerouting, it would have received a
substantially lower share of the revenue.

On reply, NS identified some additional investment costs that would have needed to be
incurred by the residual NS as a result of the reroutings, but NS did not address the difference in
the operating costs for the residual NS that would likely have resulted from carrying this sizeable
amount of traffic over different, longer, off-SARR routes. Nor did the parties address the likely
off-SARR operational implications of the reroutings, or whether the transportation needs of the
customers involved would have been met using substantially longer routes with presumably
longer cycle times.

Such an incomplete presentation would defeat the objective of the SAC test—to
determine what the defendant carrier would need to charge for its current service by measuring
all of the costs (including a reasonable return on investment) needed to serve a subset of the
defendant carrier’s traffic while excluding any costs attributable to carrier inefficiencies or cross-subsidization of traffic not included in that traffic subset. In making a SAC presentation, a
complainant may select a subset of the defendant’s traffic for study (rather than the
complainant’s traffic alone) in order to realize the benefit of the economies of scale, scope, and
density inherent in the railroad industry and enjoyed by the defendant. Guidelines, 1 I.C.C.2d at
544. And for non-issue traffic, it may also use the device of cross-over traffic—rather than
extending the SARR to far-flung origins and destinations of non-issue traffic (which could lead
to a SARR of potentially nationwide reach)—to realize the full benefit of those economies.
Nevada Power, 10 I.C.C.2d at 265-67 & n.12. But to change the way traffic would be handled
beyond the boundaries of a SARR introduces additional variables that must be accounted for in
the SAC calculus.

Duke would have had the Board simply assume that off-SARR revenues would be
sufficient to cover whatever additional off-SARR costs there might be.
But to do so would be
to presuppose the very matter to be determined through the SAC analysis, i.e., how total revenues
compare to total costs for the group of shipments selected for the traffic group.

Because the record developed by the parties did not allow the Board to identify and
quantify all of the impacts associated with the rerouting of cross-over traffic, the Board issued an
order on October 10, 2003, directing the parties to submit supplemental evidence. That order
instructed the parties, at a minimum, to quantify the revenues and costs (including both operating
costs and, if applicable, investment costs) of the ACC attributable to these reroutings, so that to
the extent the reroutings were to be disallowed then the effects of those reroutings could be
removed, as in the TMPA case.

Duke contends that, because of the short time frame for response, it was unable to
quantify all of the impacts of returning the cross-over traffic to NS’s usual route. Comparison of
its rebuttal and supplementary DCF analyses shows that Duke reduced the ACC’s investment
costs by approximately $1.1 million, operating costs by approximately $20 million, and earnings
by approximately $28.4 million. NS, in its supplemental evidence, reduced the ACC’s
investment in track by approximately $49 million, its operating costs by approximately $23
million, and its revenues by approximately $31 million to reflect the return of the cross-over
traffic to NS’s usual route. NS also removed the approximately $30 million of off-SARR
investment costs that it had earlier identified.

In its supplemental evidence, Duke proposed to continue to reroute approximately 1.7
million tons of coal moving to eastern North Carolina (which it would have the ACC interchange
with the residual NS at Winston-Salem for delivery east of Greensboro), on the ground that NS
had not objected to the rerouting of that traffic. The reroute for that traffic is approximately 21
miles longer than NS’s usual route (through Altavista) and would result in an additional $3.2
million share of the revenues for the ACC. In its reply to that supplemental evidence, however,
NS made clear that its objections to the reroutings embraced that traffic, since NS alleged that
Duke had failed to fully account for the costs and operational ramifications on the residual NS.
Therefore, as with the other originally proposed reroutes of cross-over traffic that would result in
longer total hauls and would affect the portion of the movement handled by the residual NS, the
rerouting is disallowed here because, even though the additional mileage is small, Duke has not
sufficiently taken into account all of the impacts on the affected shippers or the residual NS.

For some movements, however, the total length of haul using the reroute would be shorter
than NS’s usual route. Those movements involve approximately 0.5 million tons of coal that
would originate at mines north and west of Bluestone, WV, and would be destined to Port
Wentworth, GA and Wateree, SC.
The rerouting of those movements is included in the SAC
analysis here, along with a 7,000-foot interchange track at Charlotte, which the parties have
agreed would be needed to accommodate the interchange of traffic at Charlotte.

C. Operating Plan

To limit operating expenses, Duke chose an operating plan for the ACC that is different
from how NS conducts its coal-hauling operations in the Central Appalachian region. Duke
assumes that all trains originated by the ACC would be trainload movements containing from 90
to 115 cars per train. There would be no less-than-trainload (LTL) movements, nor would any
trains exceed 115 cars in length.
Moreover, Duke assumes that the ACC would not need any
staging or gathering yard infrastructure; rather under Duke’s proposal, after loading, each ACC
train would operate as a single train from origin to destination.

NS has objected to Duke’s assumption that the mines, connecting carriers, and shippers
would be willing to accept a different level of service than NS provides. Historical data for the
traffic group that the ACC would serve show that these customers are accustomed to a greater
range of service, with some shipments exceeding 115 cars per train and many others consisting of
fewer than 90 cars. Indeed, 18% of the selected coal traffic currently moves in LTL shipments.

A core SAC principle is that the SARR must meet the transportation needs of the traffic it
would serve. Thus, as discussed in prior cases, the proponent of a SARR may not assume a
changed level of service to suit its proposed configuration unless it also presents evidence
showing that the affected shippers, connecting carriers, and receivers would not object.

Applying that principle, in West Texas Utilities Co. v. Burlington N.R.R., 1 S.T.B. 638,
667 (1996) (West Texas), the Board rejected an operating plan that would have increased average
train length, because “train sizes must reflect the operational constraints and restrictions faced by
connecting railroads, coal mines, and utilities.” Similarly, in McCarty Farms, 2 S.T.B. at 467,
the Board rejected an operating plan that would have changed the services being provided. As
the Board explained, id. (footnotes omitted):

Car loading factors and train lengths cannot be set without regard to the practices
and preferences of shippers and connecting railroads. Shippers control loading,
and connecting railroads determine train length for traffic received in interchange.

And in FMC at 38, the Board rejected the “contention that the [SARR] could dictate the type of
service to be provided.”

Duke’s assumptions here violate that principle. Its operating plan for the ACC would
require some shippers to accept trains much larger or smaller than they have been receiving. For
example, Duke would combine 7 large loadings destined for a utility at Catawba, NC, with 3
small loadings destined for Skyland, NC. The Catawba shipments now range from 95 to 140
cars in length, and the Skyland shipments from 47 to 49 cars. Under Duke’s operating plan,
these loadings would be combined. Catawba would receive 8 unit trains containing from 98 to
108 cars of coal. Two trains of 107 and 110 cars would have headed for Catawba, to be
interchanged with the NS for delivery to Skyland.
In other words, in its attempt to generate
operational efficiencies, Duke postulated an operating plan that would deliver more coal to
Skyland and in larger trains than the shipper actually takes, while Catawba would have received
less coal, in more frequent, smaller trains than it actually takes.

NS also argues that the operations proposed by Duke for the ACC would be unworkable.

Again, a review of Duke’s electronic spreadsheets and workpapers illustrates this unworkability.
Duke’s operating plan would combine cars from different mines to create unit trains. For
example, Duke’s operating plan would combine into a single 115-car train shipments destined to
three shippers located on the residual NS near Atlanta, GA, and Birmingham, AL. According to
waybill data, those shipments would consist of 24 cars of coal from the Pinnacle Creek mine, 39
cars from the Scaggs mine, and two loadings totaling a combined 52 cars from the Steer Branch
mine. Duke’s evidence shows the train containing all of this coal traveling from the Scaggs mine
to Belmont for interchange with NS and delivery to these three customers. However, the ACC
could not realistically gather cars from the three mines into a single train at the Scaggs mine and
then haul that unit train to Belmont for interchange with NS, because Duke did not provide for
staging or gathering yards where the cars from the various mines could be assembled into a
single train. Nor did its cycle-time figure for the ACC provide for the time that would be needed
for a single train to move between several mines to add cars. This example is not an isolated
instance; combining traffic from different mine origins in an unworkable way is the defining
characteristic of Duke’s operating plan.

Alternatively, Duke’s unstated assumption may have been that the source of coal for these
shippers would be shifted so that, rather than receiving coal from the Pinnacle, Hull, and Steer
Branch mines, for example, they would each receive all their coal from the Scaggs mine. But
Duke has not shown that these customers would accept such a change in their coal supply
sources. When a utility purchases coal from a particular mine, it generally does so for a specific
reason. The utility may have a favorable coal supply contract, perhaps even a requirements
contract. Moreover, coal is neither perfectly fungible nor perfectly homogeneous; there can be
important differences that affect how the coal burns. Shippers pay a premium for coal with
higher BTU content or for other specific characteristics. For example, coal with a low sulfur
content is at times used as a “sweetener,” blended together with other, higher sulfur coal so the
power plant’s emissions will comply with Clean Air Act requirements. A shipper seeking 20
carloads of low-sulfur coal would not want to receive 20 carloads of lower quality coal from
another mine. Similarly, a utility that burns 100 carloads of comparatively inexpensive, high-sulfur coal would not want to receive an unexpected and undesired shipment of more expensive,
low-sulfur coal. Thus, it is not reasonable to assume that the purchasers of coal would accept the
change in service reflected in Duke’s operating plan. Nor is it reasonable to assume that the coal
mines whose level of operations would be affected would not object.

Table 1 below illustrates how Duke’s operating plan would change the historical traffic
flows, resulting in many mines either loading more or less coal. The columns under “Forecast
from Waybill” show the traffic that Duke forecasts NS will actually load in the “peak week”
from the selected traffic group.
The columns under “ACC Operating Plan” then show how
much coal it is assumed those same mines would load in the peak week under Duke’s operating
plan for the ACC. The difference between those columns could be viewed as reflecting a
relocation of this coal traffic to different mine origins.

Table 1

Peak Week Traffic

Mine Origin

Forecast from
Waybill

ACC Operating Plan

Peak
Cars

Peak
Tons

Peak
Cars

Change

%

Peak

Tons

Change

%

Appalachia

254

24,788

254

0

0

24,789

0

0%

Biggs

410

45,633

417

7

2%

45,689

56

0%

Clinchfield

220

21,506

490

270

123%

52,308

30,802

143%

Colmont

416

42,989

482

66

16%

51,320

8,331

19%

Corneliu

157

16,441

307

150

96%

32,241

15,800

96%

Delbarton

207

22,646

182

(25)

-12%

19,733

(2,913)

-13%

Fola

317

31,282

305

(12)

-4%

31,425

143

0%

Gund

854

83,818

948

94

11%

94,672

10,854

13%

Hatcher

136

14,407

116

(20)

-15%

11,648

(2,759)

-19%

Hatfield

146

15,365

289

143

98%

30,403

15,038

98%

High Pow. Mt.

1,655

179,589

1,450

(205)

-12%

154,869

(24,720)

-14%

Hull

286

28,579

162

(124)

-43%

16,362

(12,217)

-43%

Jamboree

420

44,667

517

97

23%

55,449

10,781

24%

Koenig

116

13,233

164

48

41%

18,018

4,786

36%

Kopperston

212

24,514

591

379

179%

63,569

39,054

159%

Lavroy

523

57,251

491

(32)

-6%

53,507

(3,744)

-7%

Luke

53

5,748

180

127

240%

19,215

13,467

234%

Mabley

217

23,924

202

(15)

-7%

22,138

(1,786)

-7%

Marrowbone

324

37,024

284

(40)

-12%

31,756

(5,268)

-14%

Martiki

231

23,646

97

(134)

-58%

9,789

(13,857)

-59%

Page

709

75,779

595

(114)

-16%

62,915

(12,865)

-17%

Pardee

342

40,266

463

121

35%

54,477

14,211

35%

Pevler

296

31,391

201

(95)

-32%

22,145

(9,246)

-29%

Pinnacle Crk

608

63,077

402

(206)

-34%

42,387

(20,690)

-33%

Ramsey

152

14,727

0

(152)

-100%

0

(14,727)

-100%

Scaggs

69

7,201

115

46

67%

11,982

4,781

66%

Scarlet Glen

446

45,169

286

(160)

-36%

29,653

(15,516)

-34%

Sidney

659

71,101

622

(37)

-6%

67,596

(3,505)

-5%

Steer Branch

768

81,634

669

(99)

-13%

70,684

(10,950)

-13%

Stric

139

14,053

205

66

47%

20,990

6,937

49%

Thomas

595

66,058

585

(10)

-2%

64,646

(1,412)

-2%

Timbar

1,422

156,868

1,199

(223)

-16%

129,946

(26,923)

-17%

Toms Creek

444

49,568

502

58

13%

55,643

6,075

12%

Wentz

372

42,364

399

27

7%

45,503

3,139

7%

Source: Duke Reb. e-WP. “REVISED string chart data for NS.”

As the table shows, Duke’s operating plan would alter the historical shipping patterns at
the expense of many mines and to the benefit of others. Under Duke’s operating plan, the
Clinchfield, Corneilu, Hatfield, Kooperston, and Luke coal mines would double the amount of
coal they would load in the peak week. The Hull, Martiki, Pardee, Pevler, Pinnacle Creek, and
Scarlet Glen mines would lose more than 25% of their business to other mines. And the Ramsey
mine, which is forecast to ship 152 cars of export coal to Lambert’s Point in the peak week,
would ship no coal; all of the Ramsey shipments would be shifted and consolidated with export
coal shipments from other mines that also travel to Lambert’s Point.

In addition to denying some shippers their selection of the coal to be shipped, the ACC
would not even ship the amount of coal demanded by some of its shippers. For example, Duke
forecasts that in the peak week, the ACC would need to haul 24 cars from the Tom’s Creek mine
to Glen Lyn (located on the ACC), and 130 cars from the Fola mine and 149 cars from Timbar
mine to Kenova (for delivery by the residual NS to Ashtabula Harbor). To generate operational
efficiencies, Duke’s plan would combine these shipments into 3 trains of 95 cars each. These 3
trains would be loaded at the Fola mine and hauled by the ACC to Kenova for interchange with
NS. However, all of the coal would go to Ashtabula Harbor; Glen Lyn would be short 24 cars of
coal, representing 2,760 tons, or roughly 20% of the total coal Glen Lyn would demand in that
peak week.

In the end, the complainant’s operating plan is fatally flawed. Duke has failed to
demonstrate that the service the ACC would provide would be acceptable to all of the affected
shippers and mines involved. Yet Duke carries the burden of demonstrating that its operating
plan would meet the needs of the traffic group selected.

NS, on the other hand, has proffered an alternative operating plan for the ACC that would
provide the same service to all of the shippers and mines as they currently receive from NS.
Because Duke’s operating plan is not feasible, NS’s operating plan is used here.

D. Operating Expenses

Having accepted NS’s operating plan, the SAC analysis here necessarily uses NS’s
operating assumptions for the ACC to determine such matters as the number of locomotives,
freight cars, and train crew personnel that would be needed. But the costs of those resources are
determined based on the quality of the record presented in this case, as discussed in Appendix C.
The total operating expenses used here for the ACC are approximately $226 million in the base
year (2002).

E. Road Property Investment

Despite only a small difference between Duke’s and NS’s estimate of total track miles for
the ACC, there is a substantial difference between the parties’ estimates of the level of
investment that would be required to construct the ACC. Duke claims that the ACC could be
built for $2.2 billion, while NS claims that it would cost $5.1 billion. Appendix D discusses the
parties’ investment figures by category. As shown there, the Board’s analysis assumes that it
would cost approximately $3.6 billion to construct the ACC.

F. DCF Analysis

A discounted cash flow analysis is used to distribute the total capital costs of the ACC
over the 20-year analysis period and determine the total revenues that would be needed by the
ACC to cover its operating expenses, meet its tax obligations, recover its investment, and obtain
an adequate return on that investment. The stream of revenues that would be generated by the
ACC is compared to the stream of costs that the ACC would incur, discounted to the starting year
(2002). In this case, the most significant disagreements between the parties regarding the DCF
model relate to the indices used to adjust the ACC’s operating expenses and road property assets
(to account for projected changes in costs over the 20-year analysis period) and the cost of raising
the capital to finance the ACC.

1. Indexing

a. Operating Expenses

The parties based their estimates of inflation in operating expenses on the rail cost
adjustment factor (RCAF), which is an index of railroad costs developed on a quarterly basis.
The Board publishes two versions of the RCAF: one that does not take into account changes in
the rail industry’s productivity (referred to as the unadjusted RCAF, or the RCAF-U) and one
that does (referred to as the adjusted RCAF or RCAF-A). See 49 U.S.C. 10708 (requiring
quarterly publication by the Board of both the RCAF-U and RCAF-A).

Duke argues that the RCAF-A is the more appropriate index to use here, because the
ACC would benefit from practices and productivity enhancements occurring in the industry and
reflected in the RCAF-A. NS argues that the ACC would not achieve the same productivity
improvements anticipated for the nation’s railroad industry as a whole, and that applying the
RCAF-A would therefore be inappropriate. NS reasons that, because the ACC would be a new
railroad, it would incorporate the latest technology and the efficiencies associated with those
technologies, leaving less room for productivity improvements than there is for incumbent
railroads, which make such changes incrementally as their older technology assets wear out. NS
further argues that the ACC would not realize productivity gains from increasing traffic volume,
as the ACC’s tonnage is not projected to increase appreciably over the 20-year analysis period.

NS’s points are well taken. In the absence of any evidence on specific likely productivity
improvements for the ACC, the RCAF-U is used here to index the operating expenses. SeeTMPA at 161.

b. Road Property Assets

Duke assumed that land value would increase by 4.4% annually, based on a weighted
combination of indices reflecting rural and urban land prices. NS used a composite 3% inflation
factor, which it claims to have developed by applying separate inflation indices for rural and
urban land values. While Duke documented the composite inflation factor for land, NS has not
shown how its composite figure was computed. Therefore, the Board uses Duke’s inflation
factor for land.

To inflate the remaining (non-land) road property assets over the 20-year SAC analysis
period, Duke relied on a forecast for rail labor, materials, and supplies. NS would use historical
rates of inflation. Duke notes that a forecast was used by the Board in FMC, while NS points out
that the Board used historical inflation rates in WPL and PPL.

Forecasts of future inflation, when available, are preferable to historical inflation rates.
Forecasts take into account the outlook for the future, using available data and observations to
predict the most likely future outcome. In contrast, historical indices, which are simply a
compilation of data from the recent past, are not forward-looking. Accordingly, because Duke’s
evidence is based on forecasts of future inflation, that evidence is used here.

2. Cost of Capital

Both parties relied on a composite of the Board’s annual determinations of the rail
industry’s cost of capital for the years 1999 through 2002 to develop the ACC’s cost-of-capital
rate. However, the parties’ composite figures differ slightly (10.53% used by Duke vs. 10.57%
used by NS) as a result of how the debt and equity components were weighted. Because Duke
weighted the cost of debt and equity appropriately, its composite figure is used here.

Finally, Duke objects to NS’s proposed additive of financing costs (3% placement costs
plus fees) to cover the cost of raising new equity capital. Duke argues that the annual cost of
capital computation already includes flotation fees. Duke further asserts that NS did not incur
these fees, and thus the fees should not be included here. Duke’s points are well taken. In WPL
(at 107) and TMPA (at 162), the Board rejected the same argument made by NS here, and that
argument is similarly rejected here.

3. Results

The results of the Board’s DCF calculations are shown in Table 2, below. As that table
shows, based on the record presented here, over the 20-year SAC analysis period the ACC would
experience a cumulative revenue shortfall of approximately $550 million. Thus, Duke has not
demonstrated that the challenged rates are unreasonably high.

Table 2

Cash Flow

(Millions of Dollars)

Year

Capital

Annual

Total

Annual

Annual

Annual

Cumulative

Costs

Operating

Annual

Revenues

Over/(Under)

Over/(Under)

Over/(Under)

& Taxes

Costs

Costs

Payment

Payment

Payment

(Current)

(Present
Value)

(Present
Value)

2002

$333.6

$226.1

$559.6

$487.1

($72.5)

($69.0)

($69.0)

2003

343.8

234.4

578.2

554.1

(24.1)

(20.8)

(89.7)

2004

354.7

232.0

586.7

548.6

(38.1)

(29.7)

(119.4)

2005

366.0

238.2

604.2

575.2

(29.0)

(20.4)

(139.8)

2006

377.9

247.9

625.8

596.0

(29.9)

(19.0)

(158.8)

2007

389.7

258.6

648.3

621.7

(26.6)

(15.3)

(174.2)

2008

401.5

266.3

667.9

636.3

(31.6)

(16.5)

(190.6)

2009

413.7

271.2

684.9

642.1

(42.8)

(20.2)

(210.8)

2010

426.7

276.4

703.1

645.4

(57.7)

(24.6)

(235.4)

2011

440.5

282.0

722.5

652.0

(70.4)

(27.2)

(262.6)

2012

454.7

286.3

741.0

654.1

(86.8)

(30.3)

(293.0)

2013

469.4

296.1

765.6

672.5

(93.0)

(29.4)

(322.4)

2014

484.7

305.3

789.9

687.1

(102.8)

(29.4)

(351.8)

2015

500.4

316.6

817.0

708.2

(108.8)

(28.1)

(379.9)

2016

516.7

323.2

839.9

715.2

(124.7)

(29.2)

(409.1)

2017

533.5

332.9

866.4

731.3

(135.1)

(28.6)

(437.7)

2018

551.0

341.8

892.7

742.1

(150.6)

(28.9)

(466.6)

2019

569.0

353.0

922.0

760.0

(162.0)

(28.1)

(494.7)

2020

587.6

363.9

951.5

772.9

(178.6)

(28.0)

(522.6)

2021

606.9

373.5

980.4

782.9

(197.5)

(28.0)

(550.7)

PHASING CONSIDERATION

At times, a rate that may not have been proved unreasonable under a SAC test may be an
increase that causes significant economic dislocation or have other inequitable consequences that
may need to be mitigated for the greater public good. Therefore, the Guidelines include a
“phasing” constraint on railroad pricing. SeeGuidelines, 1 I.C.C.2d at 546-47 (establishing the
phasing constraint as “an independent constraint relating not to the reasonableness of the ultimate
rate, but to the reasonableness of collecting it immediately”). This constraint limits the
introduction of otherwise-permissible rate increases if they would lead to severe dislocation of
economic resources.

In this case, Duke complains not merely of the rate level, but also of the magnitude of the
rate increase. In 2000, the parties entered into a contract that covered the complaint movement.
Thereafter, NS notified Duke that it would terminate that short-term contract at the end of 2001.
When the parties could not reach an agreement, NS established new common carrier rates for
2002 that were more than 50% higher than the 2001 rates. Duke states that the annual cost to
Duke of the increase in these rates is more than $50 million.

NS cannot dispute the magnitude of the rate increase, but it insists that Duke can afford
the rate increases. It notes that Duke is a large company with annual profits greater than NS’s
and that Duke can pass its transportation costs on to its customers. Furthermore, NS contends
that the amount of the annual increase in transportation charges is relatively small in comparison
with Duke’s 2001 operating revenues, net income, and total retail electricity sales.

However, as NS also acknowledges, these rate increases alone amount to approximately
10% of Duke’s total ($500 million) annual cost to generate electricity at the issue plants.
Given
the magnitude of these rate increases and Duke’s objection to them, this may be an appropriate
situation for the application of the phasing constraint.

The phasing constraint has not yet been applied in a case, and the Guidelines provide only
cursory guidance on the subject. Therefore, if Duke elects to pursue relief under the phasing
constraint, the parties should be prepared to address whether phasing is appropriate under the
circumstances presented here, what level of rate increases would violate that constraint, and an
appropriate means for applying the phasing constraint.

In proposing ways to apply the phasing constraint, the parties should be mindful that any
approach should tie the phasing constraint to the revenue needs of the defendant railroad.
Moreover, it should provide some restraint to a railroad’s pricing even if the railroad falls far
short of the Board’s measure of revenue adequacy or has only a small base of potentially captive
shippers to cover its revenue shortfall.

Duke should advise the Board, within 30 days of the service date of this decision, whether
it wishes to seek relief under the phasing constraint. If Duke elects to pursue this option, it
should suggest a procedural schedule that would permit expedited discovery of the phasing-related materials previously sought by NS
and the filing of evidence and argument by the
parties and would permit quick and fair Board review.

If Duke chooses not to seek relief under the phasing constraint, the Board will discontinue
this proceeding.

This decision will not significantly affect the quality of the human environment or the
conservation of energy resources

It is ordered:

1. Duke should advise the Board within 30 days of the service of this decision whether it
wishes to seek relief under the phasing constraint.

2. This decision is effective December 6, 2003.

By the Board, Chairman Nober.

Vernon A. Williams

Secretary

APPENDIX A – ACC CONFIGURATION

As shown in the following map, the ACC would replicate approximately 1,100 miles of
existing NS lines extending south from Kenova, WV, through portions of the states of Kentucky
and Virginia, to Belmont, NC. The ACC would be primarily a single-track system, with passing
sidings, yards, and set-out tracks located at strategic points along the route. It would interchange
traffic with NS at seven locations. The ACC was designed to move a peak-year total of
approximately 88 million tons of traffic.

The ACC would originate the bulk of the coal it handles, although it would receive some
coal from NS via interchange at Appalachia, VA (the western terminus of the ACC system). The
ACC would serve Central Appalachian coal mines and five Duke power plants in North Carolina
(the Allen, Belews Creek, Buck, Dan River, and Marshall plants). The ACC would also provide
local service to two other power plants (Appalachian Power’s Glen Lyn generating station in
Glen Lyn, VA, and Clinch River plant at Carbo, VA), one major manufacturer (Celanese’s Celco
plant at Narrows, VA), and two barge transload facilities on the Ohio River. However, most of
the traffic moving over the ACC would be interchanged with NS. This cross-over traffic would
include a certain amount of grain in trainload bridge service between Kenova and West Roanoke.

(See PDF file for image.)

A. ACC Route

Beginning at Kenova, WV, the ACC would interchange northbound coal traffic from its
main line to NS for movement to utilities and other points north of the Ohio River, and receive
southbound grain traffic from NS. Proceeding in a southeasterly direction, the ACC would
replicate the existing NS main line to Bluefield, WV, via Naugatuck, Devon, and Iaeger, WV.

A secondary line would extend north of Bluefield from a connection at Bluestone, WV, to
Elmore, WV, where there would be two connecting branch lines. One branch line would serve
the NS interchange at Alloy, WV, and the Fola and High Power Mountain mines.
The other
branch line would serve the Pinnacle Creek, Pineville, Hatcher, and Kopperston mines. Another
secondary line would extend westward from Bluefield to Norton, VA, connecting with NS at St.
Paul and Appalachia, VA, and linking the Steer, Kelly View, Pardee, and Wentz branch lines in
Virginia.

South and east of Bluefield, the ACC main line would replicate the NS line from
Bluefield to Narrows, VA, Salem, VA, and then West Roanoke, VA.
From West Roanoke, the
ACC main line would proceed southward to Winston-Salem, NC, replicating the NS main line
via Martinsville, VA, Stoneville, NC, and Belews Creek Junction, NC. The main line would
continue southward from Winston-Salem to Charlotte, and from Charlotte it would extend
westward 13.0 miles to Belmont, NC.

The ACC would have the following branch lines: (1) the Ceredo branch, extending from
Kenova to Colmont mine via Ceredo, where the ACC would also serve a rail/barge transfer
terminal on the Ohio River; (2) the Wolf Creek branch, extending from Wolf Creek Junction,
WV, to the Martiki, Pontiki, Bradbury, and Pevler mines; (3) the Naugatuck branch, extending
from Naugatuck, WV, to the Marrowbone, Delbarton, and Scarlet Glen mines; (4) the Nolan
branch, extending from Nolan, WV, to the Hatfield, Sandlick, Sidney, and Gund mines; (5) the
Mate Creek branch, extending from Mate Creek Junction, WV, to the Mabley mine; (6) the
Arrow branch, extending from Arrow, WV, to the Thomas and Jamboree mines; (7) the Devon
branch, extending from Devon, WV, to the Luke, Stric, Biggs, Koenig, Corneliu, and Page
mines; (8) the Wharncliffe branch, extending from Wharncliffe, WV, to the Timbar and Scaggs
mines; (9) the Elmore West branch, extending from Elmore, WV, to the Pinnacle Creek,
Pineville, Hatcher, and Kopperston mines; (10) the Elmore North branch, extending from Elmore
to the Fola mine and High Power Mountain mine (this branch would also serve as an interchange
point with NS at Alloy, WV); (11) the Norton branch serving the Clinchfield and Tom’s Creek
mines, and an interchange with NS at St. Paul, VA; and (12) the Steer, Kelly View, Pardee, and
Wentz branches serving mines with the same names and an interchange with NS at Appalachia,
VA.

Table A-1 shows the ACC’s line segments and route mileages.

Table A-1ACC Route Mileage

Main Line and Secondary Line Route Miles

Kenova to Devon

97.34

Devon to Bluefield

71.99

Bluestone to Elmore Branch

33.64

Bluefield to Norton Branch

100.81

Bluefield to West Roanoke

102.84

West Roanoke to Winston-Salem

120.95

Winston-Salem to Belmont

96.21

Total

623.78

Branch Line Route Miles

Ceredo Branch

40.03

Wolf Creek Branch

23.17

Naugatuck Branch

24.74

Nolan Branch

19.20

Mate Creek Branch

6.37

Arrow Branch

13.44

Devon Branch

71.08

Wharncliffe Branch

11.40

Elmore West Branch

55.71

Elmore North Branch

94.64

Norton Branches

40.58

Dan River Branch

13.00

Belews Creek Branch

4.02

Buck Branch

14.83

Catawba Branch

37.16

Allen Spur

3.00

Misc. mine spurs

11.90

Total

484.27

Total Route Miles

1,108.05

B. Track Miles

The parties disagree on the total track miles that the ACC would need. The parties’ track-mile estimates are summarized in Table A-2, and the differences in their estimates are discussed
below.

Table A-2

ACC Track Miles

Category

Duke

NS

STB

Single track

1108.05

1108.05

1108.05

Passing sidings

148.35

165.05

153.60

Yard track

67.33

102.92

102.92

Set-out track

7.59

14.26

14.26

Total Track Miles

1331.32

1390.28

1378.83

1. Main Line and Secondary Line Track Miles

The system configuration presented by Duke in its opening evidence is based on the
opinion of its experts. Duke tested this configuration with a proprietary string computer model
to determine whether the ACC system would have sufficient track capacity to handle peak-week
traffic during the peak-year without undue delay. NS also tested Duke’s configuration, using
another computer model called the Rail Dispatch and Capacity Analysis Model (RDCAM).
Based on its tests, NS argues that Duke’s configuration would be inadequate to move the peak-period traffic, that it does not account for many required rail activities, and that it fails to account
for the physical limitations of many of the ACC’s proposed facilities. Thus, the ACC would
become gridlocked, according to NS. NS also points to other defects in the string model that it
claims produce bizarre operational results. NS would add additional capacity to Duke’s ACC
system based on the result of an iterative process in which it used the RDCAM model to test a
series of incremental additions to the system to determine whether the addition would result in
sufficient capacity to move the selected peak-week traffic.

On rebuttal, Duke made changes to both its string model and its configuration for the
ACC based on NS’s comments. Duke asserts that, given similar inputs, both computerized
capacity models should now produce similar results. Duke has supplied its computer model.
However, the program contains undocumented algorithms/subroutines, along with poorly
documented databases, so that it cannot be determined whether Duke’s revisions made in
response to NS’s criticisms of the model resolved any of the questions raised by NS. The lack of
documentation prevents the Board from testing the reliability of the model’s results. Thus, Duke
has not met its burden of showing that its main line and secondary line configurations are
feasible, by demonstrating that its ACC system would have sufficient track capacity to move the
peak-period traffic.

In any event, because, as discussed in the body of the decision, Duke’s operating plan for
the ACC is rejected, its ACC configuration must also be rejected.
Accordingly, NS’s main line
and secondary line track mile estimates are used here.

2. Branch Line Track Miles

Duke and NS agree on the branch line route mileages for the ACC, but they disagree on
the track configurations that would be needed. Duke initially assumed that all of the branch
lines would consist of single track with passing sidings. NS suggests several changes to the
proposed track facilities at mine sites, which NS claims would be needed for the ACC to access
loading points or provide sufficient space for efficient train operations. Duke agrees to these
changes for the Pontiki, Marrowbone, Scaggs, Hull, Hatcher, Ramsey, and Kelly View mines.
But as to the other mines Duke maintains that its proposed configuration is adequate because,
unlike NS, the ACC would use locomotives at both ends of the trains. Duke claims that this
distributed power (DP) service would negate the need for “run-around” tracks, as it would
permit the ACC, upon arrival at the mine, to move the crew to the other end, switching command
to the new head (former tail) locomotive. Duke’s approach is reasonable, and the analysis here
is based upon use of DP service.

The track facilities at each mine where the parties do not agree are discussed below. For
many of the locations, a diagram, showing the configuration initially proposed by Duke, as well
as NS’s proposed modifications, is included.

a. Ceredo Branch

∙ Colmont Mine

(See PDF file for image.)

NS asserts that while Duke included track running past the mine, facilities would need to
be added to serve the coal tipple. NS would add a 7,000-foot loadout track, attached to the line
by two turnouts and a crossover. Duke argues that no such addition would be necessary, as the
ACC would locate the main track directly under the mine loadout. Because the mine is at the end
of the track on this branch, and the Colmont spur would be solely dedicated to the mine, the use
of DP would negate the need for ACC’s locomotives to be able to run around the coal cars.
Therefore, Duke’s routing of the track under the loadout would be feasible, and Duke’s
configuration is accepted.

b. Wolf Creek Branch

∙ Martiki Mine

(See PDF file for image.)

NS would add a turnout to Duke’s single track, claiming that without it the ACC would
have to split the train and take it through a long backup move. Duke notes that the loadout track
would be 1.1 miles long, which would be sufficient to handle a 105-car DP train. Thus, Duke
argues, the loadout track would not require locomotives to run around the train and therefore
would not require a turnout. Given the proposed use of DP locomotives, Duke’s proposal not to
include a turnout is reasonable.

∙ Bradbury Mine

Duke initially included a turnout on the single-track branch line, but on rebuttal would
remove it, claiming that the loadout facility was sited over a siding off the branch line and that
DP units could handle the operation without a turnout. However, NS did not contest the
proposed turnout and Duke cannot change its network configuration on a matter that has not been
challenged by NS. Therefore, Duke’s opening configuration is used.

∙ Pevler Mine

(See PDF file for image.)

To Duke’s proposed single track, NS would add a 7,000-foot run-around track with two
turnouts, to allow locomotives to run around trains and avoid lengthy backup movements. Duke
argues that this end-of-track mine would not require a run-around track, as the trains would be
operating with DP units. Given that the ACC would use DP locomotives, Duke’s configuration
is accepted.

c. Naugatuck Branch

∙ Marrowbone Mine

(See PDF file for image.)

To Duke’s proposed configuration, NS would add two run-around tracks (together
totaling 8,000 feet) to handle the train lengths that Duke proposes and to allow locomotives to
run around trains. Duke responds that the main line would allow sufficient space for feasible DP
operations without the added facilities. Duke’s configuration is accepted. No run-around tracks
would be needed because the mine is at the end of a spur, allowing the ACC to route the track
directly under the loadout without obstructing other traffic.

∙ Delbarton Mine

Duke proposed a single track and turnout at this mine. NS, without comment, would add
a second turnout and would also include two 1.8-mile sidings from MP 0.0 to MP 1.8 on the
Lenore to Scarlet Glen portion of the Naugatuck branch. Duke maintains that NS’s additions are
unnecessary. The configuration proposed by Duke in its opening evidence appears to be
feasible and NS has not shown otherwise. Therefore, Duke’s configuration is used here.

∙ Scarlet Glen Mine

(See PDF file for image.)

To Duke’s proposed configuration, NS would add two turnouts, to make access to the
loadout possible. Duke claims that it designed the ACC’s main track so as to have the loadout
tipple on the track, with sufficient clearance for entire trains, rather than the way in which the
track is portrayed in NS’s diagram (replicated above). Duke’s proposed configuration is
accepted. Because the mine is at the end of the track, turnouts would not be needed.

d. Nolan Branch

∙ Gund Mine

(See PDF file for image.)

NS notes that Duke’s design for single-track facilities at this mine would only allow
loading of 50-53 cars at a time. NS would add a 7,000-foot run-around track with two turnouts,
to allow full trainload operations. Duke agrees that, if the tail track could not be extended, the
train loading operations at this mine would have to be done in two parts. However, with DP
locomotives, Duke argues that only one 3,500-foot run-around track with turnouts would be
necessary. However, Duke has not shown that the tail tracks could be extended, nor has it
provided a sufficient explanation of how operations could be conducted with only a 3,500-foot
run-around track. Because Duke has not met its burden of proof here, NS’s proposed addition of
the 7,000-foot track with two turnouts is accepted.

∙ Sandlick Mine

(See PDF file for image.)

To its single-track design, Duke initially included a turnout to reach the loadout. NS,
pointing to the limited car capacity of the loadout track in Duke’s design (only 3-5 cars), argues
that, without a second turnout, the ACC would need to handle trains in many cuts, thereby
causing significant interference with operations on the main line. Duke responded that DP trains
could load directly from the main track if it were located under the loadout, and that, because
only one train per day would be loaded at this mine, the ACC could manage the traffic without
the proposed turnout. However, Duke may not change its opening configuration on rebuttal as to
a matter (the location of the loadout on a siding) that NS has not challenged. Given the limited
capacity of Duke’s proposed loadout track, the inclusion of a second turnout would be realistic.

e. Mate Creek Branch

∙ Mabley Mine

(See PDF file for image.)

To Duke’s configuration, NS would add a 7,000-foot loadout track, two additional
turnouts, and one additional crossover to accommodate 100-car trains—all of which, NS
contends, the ACC would need to reach the mine’s loading point. Duke maintains that, because
the mine is located at the end of the track, the track could be routed under the loadout. Duke
acknowledges that one of two roads that cross the tracks would have to be relocated. Because
Duke has not included the cost of relocating the road, it has not supported all elements of its
track configuration. Accordingly, NS’s suggested changes are accepted.

f. Arrow Branch

∙ Thomas Mine

To Duke’s single-track configuration, NS would add a 7,000-foot run-around track with
two turnouts, arguing that the 1.2% to 1.9% grade would make direct loading challenging.
According to NS, without these added facilities, the ACC would be forced to make long back-up
movements after loading.Citing other mines with a similarly steep grade at which NS loads
directly, and because this mine is at the end of the branch, Duke argues that DP units would be
capable of loading directly. Given that such operations are used at other mines, the additional
track facilities proposed by NS would not be needed.

g. Devon Branch

∙ Thomas Wye

Duke states that helper locomotives would be needed to serve this wye, but Duke failed to
include a pocket track for holding those locomotives. NS would add such a pocket track to hold
helper locomotives prior to the Thomas Wye. Because track to hold helper locomotives would
be needed, NS’s addition of the pocket track is accepted.

h. Glen Alum Spur

∙ Glen Alum Mine

(See PDF file for image.)

To Duke’s configuration, NS would add a 4,000-foot run-around track with two turnouts,
claiming that the added facilities would be needed because of the steep grade of the loadout track
(ranging from 2.40% to 2.77%) and the small capacity of the loadout track (only 30 cars). Duke
maintains that the ACC could manage this loadout if the main line were extended 3,000 feet.
However, there is no evidence as to whether such an extension would be possible. Thus, Duke
has not supported all elements of its track configuration for this spur, nor has it refuted NS’s
argument concerning the problem posed by the grade at the loadout. Therefore, the facilities
added by NS are accepted.

i. Elmore West Branch

∙ Pineville Mine

Duke proposed a single-track line and one turnout. NS would also add an additional
turnout, to allow locomotives to run around trains. Duke contends that the use of DP would
negate the need for an additional turnout. Duke’s track configuration at this mine is accepted,
because its proposal to use DP locomotives makes run-around track unnecessary.

∙ Kopperston Mine

(See PDF file for image.)

NS states that Duke’s proposed single track configuration is inadequate because the 2.3%
grade at this mine would make loading long trains difficult. To alleviate this problem, NS would
add 3,000 feet of track 5 miles down the line to hold the first cut of loaded cars. In addition, NS
would add a crossover and turnout to reach the loadout. Duke responds that, if the loadout track
were extended to twice its length, the trains could be loaded in one cut, making the switches and
additional track unnecessary.

However, Duke, which concedes that its initial proposal is inadequate, has not shown
that NS’s proposed modification is unrealistically excessive. Indeed, Duke has not shown that
the loadout track could be extended so as to obviate the need for the switches and additional
track. Therefore, Duke’s modified proposal offered on rebuttal is rejected and NS’s proposed
trackage changes are accepted.

k. Steer Branch

∙ Steer Branch Mine

(See PDF file for image.)

To Duke’s proposed configuration, NS would add a 4,000-foot run-around track to allow
handling of 100-car trains. Duke argues that NS has not shown that the tail track beyond the
loadout is insufficient to load 100 cars in a single cut. But it is Duke that has the burden of
demonstrating the feasibility of its proposed operation. Duke must show that the track could
accommodate 100 cars; it cannot merely assume so when that assumption is brought into
question by NS. Because Duke has not met its burden of proof, NS’s track configuration at this
mine is used.

3. Yard Tracks

Although the parties generally agree on the location of the ACC yards, they do not agree
on the yard track requirements. NS argues that Duke’s proposed yard facilities would be
inadequate to accommodate all of the activities that would be required to serve the ACC’s traffic
group. Specifically, NS argues that Duke has failed to provide adequate yard facilities to stage
LTL blocks and to classify multiple cuts of cars into trainload quantities for line-haul movement.
In addition, NS argues that the ACC’s yard facilities would need to be able to accommodate the
inspection and repair of empty cars, accommodate the building of empty trains for return to the
mines, hold bad-order cars pending movement to a repair facility, fuel and repair locomotives,
and hold loaded and empty trains awaiting interchange with NS.

Duke maintains that additional yard trackage would be unnecessary because NS has
overstated the space and time required to perform various functions at these yards. Duke states
that the principal functions to be performed at the yards would be crew changes, interchanges
with the residual NS, and, at West Roanoke and Kenova, 1,000-mile inspections, the related
removal/insertion of cars from/into trains, and locomotive refueling. Duke states that no
assembling or disassembling of trains would occur, because the ACC would operate only unit
trains.

However, as discussed in the body of the decision, a significant part of the ACC traffic
group is LTL movements, which would require staging, switching, and sorting. Duke has not
shown that customers purchasing LTL shipments from individual mines would either desire or be
able to ship in trainload quantities from those mines. Indeed, on rebuttal Duke concedes that it
did not provide sufficient yard investment to handle the LTL traffic. Duke has not shown that
NS’s yard configuration would be inappropriate for handling LTL shipments. Therefore, NS’s
yard track configurations are generally used.

4. Set-out Tracks

Duke would place two set-out tracks at each failed equipment detector. One would be a
single-ended 300-foot track, while the other would be a longer track with switches at both ends.
Duke contends that its configuration would have sufficient length to accommodate both bad-order cars and the occasional piece of MOW equipment. NS accepts Duke’s placement but
argues that the longer track should have another switch and an extension track 1,500 feet long to
provide more space for MOW equipment. Because NS’s MOW plan is used, NS’s proposed
additional track and switches are accepted.

APPENDIX B – TRAFFIC VOLUMES AND REVENUES

This appendix examines the volumes of traffic that the ACC would transport, and the
revenues that it would receive from that traffic, over the 20-year SAC analysis period (2002-2021). Because the parties agree on the volume and revenue projections for the grain traffic that
the ACC would handle, the discussion here addresses only the coal traffic.

A. ACC Tonnage

1. 2002 Through 2004

For the first half of 2002, the record contains actual data on the traffic that moved,
showing a significant drop in NS’s Central Appalachian coal traffic from the first half of 2001.
Because actual data are clearly superior to any forecast or projection, they are used here.

Duke assumed that the tonnage reduction in the first half of the year was temporary and
that this traffic would rebound in the second half of the year and continue to increase in 2003 and
2004. Duke claims to have developed its projections using 2001 as a baseline and applying to
those traffic levels the rates of expected traffic growth contained in internal business forecasts
obtained from NS through discovery. NS argues that forecasting increases based on 2001
traffic levels is not realistic and leads to higher tonnage projections than contained in NS’s
business forecast.

Accordingly, NS offered two different traffic projections. Its “base case” uses the
movement-specific tonnage contained in its business forecast, augmented to account for spot coal
movements, which had not been included in that business forecast. NS also submitted an
“alternative case” reflecting what it argues is a more up-to-date assessment of expected traffic for
2003 and 2004. The alternative estimate lowered NS’s 2003 and 2004 projections from its base
case by approximately 4 million tons per year.

The core assumption underlying Duke’s figures is that 2001 was a “normal” year, to
which it would be appropriate to apply NS’s growth forecasts. However, Duke has not supported
that assumption. NS’s business forecasts, and its actual experience in the first half of 2002,
indicate that 2001 was an abnormally good year. It is inappropriate to forecast future volumes by
using an unusually good year as a baseline. Such a technique would overestimate, perhaps
significantly, the projections.

NS’s “alternative case” is also unsupported, as NS did not provide documentation for its
assertion that some shippers included in its business forecast will discontinue their use of Central
Appalachian coal. But even if it had, the Board would have no way to determine if NS had
selectively ignored information from other shippers indicating an offsetting increase in coal
consumption. For that reason, forecasts that were prepared in the ordinary course of business
before litigation arose are preferable to projections developed to further the litigating position of
the parties. SeeTMPA at 29.

NS’s “base case” estimates provide the best evidence of record, as they are derived from
NS business forecasts, prepared in the ordinary course of business. Thus, those estimates are
used here.

2. 2005-2021 Coal Traffic

Duke provided two tonnage projections for this period. Its case-in-chief would hold
tonnage constant at its 2004 forecast level. In the alternative, Duke would use the 2002 forecast
of the Energy Information Administration (EIA 2002) to project tonnages beyond 2004, except
for tonnages to certain designated utility plants in the South, for which Duke assumed a flat
tonnage.

NS also presented two forecasts for this period. It used the EIA 2002 forecast for its
“base case” tonnage after 2004. It also presented an “alternative case” using a composite of
forecasts by the EIA and various other forecasters. NS would use these forecasts for all traffic
other than Duke’s. For Duke’s tonnage, NS would use Duke’s forecast for coal usage that Duke
filed with the North Carolina Department of Environmental and Natural Resources.

As the Board has stated before, it is preferable to rely on coal demand forecasts that have
not been specifically prepared for litigation. SeeTMPA at 29. Moreover, composite forecasts
can be manipulated through the selective inclusion or exclusion of forecasts. Thus, they are less
reliable than a single forecast prepared by an independent, neutral source.

Here, both parties have used EIA forecasts as a reliable source for portions of their
presentations. EIA, an independent statistical arm of the Department of Energy, was created by
Congress for the express purpose of providing policy-neutral data and forecasts. Thus, EIA
provides an authoritative source for coal forecasts.

After the close of the record, new significantly revised EIA forecasts were issued. The
EIA 2003 forecast reflects virtually flat Central Appalachian coal production (fluctuating
between 252 and 260 million tons) during the 2005-2021 period. The Board takes official
notice of these updated government forecasts of traffic for the Central Appalachian coal
producing region, which are available from EIA. These most recent EIA forecasts largely
confirm Duke’s assertion that tonnage from mines that would be served by the ACC will remain
relatively constant. The Board therefore uses the Central Appalachian EIA 2003 regional
forecasts here to develop the projections for tonnage that would move over the SARR between
2005 and 2021.

Table B-1 below presents the parties’ positions and the Board’s findings on volumes.

Table B-1

ACC Tonnages

Year

Duke

NS Base Case

NS Alternate Case

STB

2002

85,734,129

77,945,154

76,364,116

77,945,154

2003

87,889,142

85,924,627

81,785,010

85,924,627

2004

83,873,383

82,003,992

77,771,293

82,003,992

2005

81,292,342

78,287,285

75,341,973

82,299,655

2006

81,806,229

76,976,050

73,680,283

83,966,883

2007

82,425,580

76,699,932

71,033,925

86,914,694

2008

82,026,827

76,484,113

69,381,453

87,774,905

2009

81,670,543

76,035,119

67,785,020

87,322,884

2010

80,931,932

75,107,173

66,119,710

86,825,550

2011

82,746,786

77,698,046

64,506,957

86,299,869

2012

82,649,532

77,363,534

63,889,575

85,137,011

2013

81,376,998

76,013,684

63,279,894

86,048,576

2014

80,468,066

75,215,654

62,677,820

86,345,588

2015

79,881,551

74,775,975

62,083,258

87,342,542

2016

80,046,787

74,810,895

61,496,113

86,738,586

2017

79,542,076

74,110,195

61,230,293

86,844,659

2018

78,397,543

72,775,911

60,965,994

86,460,088

2019

78,383,506

72,935,983

60,703,207

86,730,778

2020

77,987,753

72,523,643

60,441,922

86,681,007

2021

77,987,753

72,118,038

60,182,132

86,067,847

Note: The volume projections used here are greater after 2005 than either party’s
because the 2003 EIA forecast reflects relatively stable coal production for the
Central Appalachian region, whereas the earlier EIA forecast reflected in the
parties’ evidence projected declining production for that region.

B. Revenues

The parties used different methods for forecasting future rates for the coal traffic in the
group. The table below shows the parties’ revenue forecasts for the traffic group and the
figures used by the Board here. (The table reflects the Board’s disallowance of rerouting of
cross-over traffic in this case, as discussed in the body of the decision, except for the three
shipments where the rerouting would shorten the total movement.)

Table B-2

ACC Revenues

Year

Duke

NS Base Case

NS Alternate Case

STB

2002

$576,846,403

$487,464,767

$457,346,768

$487,112,921

2003

596,835,775

552,552,481

511,483,629

554,090,690

2004

586,700,579

537,825,366

505,954,421

548,566,016

2005

585,576,242

521,996,859

495,168,468

575,219,504

2006

600,324,960

526,667,778

497,302,079

595,967,647

2007

613,896,638

523,322,703

481,322,242

621,738,779

2008

623,125,408

532,012,898

482,148,491

636,326,465

2009

633,525,494

541,215,973

483,407,541

642,094,543

2010

643,718,652

546,064,947

482,376,628

645,399,612

2011

670,986,621

571,004,479

483,134,928

652,028,866

2012

689,935,488

581,070,189

489,331,977

654,136,195

2013

703,070,624

585,820,851

495,865,783

672,522,810

2014

718,768,581

593,827,643

502,914,344

687,090,603

2015

736,974,438

603,601,674

510,294,093

708,212,549

2016

760,579,243

615,969,398

518,231,386

715,205,822

2017

781,378,644

624,456,589

528,602,451

731,291,979

2018

798,978,510

629,839,183

539,505,383

742,091,999

2019

824,291,535

645,439,835

550,759,835

759,994,553

2020

847,638,017

658,667,868

562,186,341

772,931,932

2021

874,278,497

670,850,619

573,929,859

782,930,285

Note: The Board’s number for 2002 is lower than either of the party’s because the
Board’s revenue figure reflects use of the modified straight-mileage prorate for
revenue divisions.

1. Rates on Traffic Subject to Pending Rate Complaints

Duke questions the propriety of basing a SAC analysis on challenged rates that it claims
have been inflated in anticipation of rate litigation before the Board. It suggests that the revenue
forecasts for that traffic instead be based upon either the previous rates or a 10% markup over the
previous rates (either of which are lower than the challenged rates), so that the alleged
manipulation would not influence the amount of relief awarded if the rates were found to be
unreasonable. However, because the challenged rates have not been shown to be unreasonably
high, this issue need not be addressed here.

2. Rates on Traffic Moving Under Contract

The parties agree, that while traffic is moving under an existing contract, it is the contract
that determines the rates that traffic would pay.

3. Rates on Traffic After Expiration of Contracts

To develop the rates that ACC traffic would pay after existing contracts expire, Duke
used an approach similar to that used in WPL. For traffic that a rail carrier would deliver to final
destination, Duke assumed that, following expiration of an existing contract, rates would escalate
by the average escalation factor contained in the remaining unexpired contracts. For traffic that a
railroad would turn over to another mode of transportation for final delivery, Duke assumed that
the rates would escalate based on a relationship between the average escalation factors in current
contracts and an index of rail costs published by the Board pursuant to 49 U.S.C. 10708.

NS, in contrast, would apply the average percentage change in rates from its 2002
business forecast through 2004 for any traffic whose contract would expire before the end of
2004, and for subsequent years NS would apply EIA’s nationwide coal transportation rate
forecast. Recognizing that there is some relationship between rate levels and traffic volumes, NS
submits that use of EIA rate forecasts preserves the economic assumptions that EIA used to make
its volume forecasts. NS points out that Duke’s volume forecasts are unrelated to its rate
forecasts.

Duke disagrees with NS’s use of EIA forecasts for contracts that expire after 2004. Duke
argues that reliance on nationwide rate forecasts is not appropriate, as nationwide coal rate trends
are not necessarily representative of rate trends for the Central Appalachian region.

As the Board explained in TMPA (at 29), reliance on impartial EIA forecasts is
preferable. Duke’s use of a historic escalation factor is inferior when impartial forecasts such as
EIA’s exist. However, Duke’s point is well taken that national forecasts may not be
representative of rate trends in Central Appalachia. Therefore, as with the EIA forecasts for
traffic volumes, the analysis here uses EIA 2003 rate forecasts that are specific to the Central
Appalachian region.

APPENDIX C – OPERATING EXPENSES

This appendix addresses the annual operating expenses that would be incurred by the
ACC. The manner in which a railroad operates and the amount of traffic it handles are the major
determinants of the expenses a railroad incurs in its day-to-day operations. As discussed in the
body of the decision, NS’s proposed operating plan for the ACC is used here, which means that
NS’s operating assumptions determine the level of operational resources that the ACC would
need for a given level of traffic. As also discussed in the body of the decision, the rerouting of
certain traffic proposed by Duke is disallowed, which has the effect of reducing the overall
operating expenses initially estimated by the parties.

Table C-1 summarizes the operating costs used here. The costs in dispute are discussed
below.

Table C-1

ACC Annual Operating Costs (2002)

($ millions)

Duke

NS

STB

Train & Engine Personnel

$15.3

$43.4

$37.1

Locomotive Ownership

18.1

34.8

27.5

Locomotive Maintenance

14.1

27.1

21.6

Locomotive Operations*

31.9

27.4

18.9

Railcars **

17.2

26.1

26.2

Ad Valorem Tax

6.6

6.8

6.8

Operating Managers

7.2

13.8

12.1

Materials & Supplies

0.8

1.9

1.4

General & Administrative

10.4

23.0

13.0

Start-up Costs

4.5

72.3

8.0

Loss & Damage

0.1

0.1

0.1

Maintenance-of-Way

10.9

50.3

49.7

Insurance

3.2

7.0

4.3

Trackage Rights Fee

0.3

2.2

0.3

TOTAL

$140.5

$336.1

$226.5

* The Board’s estimate of locomotive operations is lower than either party’s because the
restatement relies upon NS’s locomotive unit miles (which are substantially lower than Duke’s)
and upon Duke’s gallons per locomotive-mile and costs per gallon (which are lower than those
based on the rejected NS fuel study).

** The Board’s figure for railcar expenses is slightly higher than even NS’s estimate because 3
rerouted movements are included in the analysis here.

A. Locomotives

1. Locomotive Requirements

The parties agree on the unit cost for acquiring (leasing) locomotives, but as shown in
Table C-2, there is a substantial difference in the number of locomotives each party assumes the
ACC would need.

Table C-2

Locomotive Requirements

Duke

NS

STB

Road

103

199

154

Helper

9

15

15

Switch

4

10

10

Total

116

224

179

Locomotive requirements are primarily determined by how the ACC would operate.
Because NS’s operating plan has been accepted, the basic number of road, helper, and switch
locomotives required by that plan are used here. However, individual locomotives would not be
available 100% of the time, and therefore additional (spare margin) locomotives would need to
be acquired. Duke proposed a spare margin of 5% and supported this figure with witness
testimony. NS proposed a 30% spare margin but provided no explanation as to the derivation of
this figure. Because NS has not shown that Duke’s proposed spare margin is unreasonable, nor
provided support for its alternative, a 5% locomotive spare margin is used here.

2. Locomotive Maintenance Expense

The parties agree on the maintenance expense per locomotive. The agreed-upon
maintenance expense is used in conjunction with the restated number of locomotives the ACC
would need to develop total locomotive maintenance expense.

3. Locomotive Operating Expense

Table C-3 summarizes the unit costs for fuel and locomotive servicing. These unit costs
are used in conjunction with the restated number of locomotives the ACC would need to develop
total locomotive operating expense.

Table C-3

Fuel and Servicing Expenses

Duke

NS

STB

Gallons of Fuel per LUMs

2.8

3.9

2.8

Fuel Price per Gallon

$0.6574

$0.7030

$0.6574

Sand and Lube per LUM

$0.1649

$0.1649

$0.1649

a. Fuel Costs

Duke used a fuel cost of $0.6574 per gallon, based on the cost reported in NS’s Annual
Report filed with the Board (the R-1 report). NS used a $0.7030 per gallon figure, claiming that
reliance on the R-1 is improper because that cost does not include the labor cost associated with
Duke’s proposed use of contractors to fuel locomotives.

Duke’s evidence is reasonable. The R-1 expenses include an embedded labor component
in the storage and dispensing costs. Furthermore, NS’s fuel cost is unsupported. Accordingly,
Duke’s per-gallon fuel cost, which has a sound basis and is superior to NS’s unsupported
evidence, is used here.

Total fuel expense also depends on the rate at which fuel is consumed. Duke relied upon
NS’s system-average fuel consumption, while NS relied on a special study of fuel consumption
for a selected group of locomotives. NS’s study is rejected because it is based on fuel
consumption for a type of locomotive that the ACC would not use. In the absence of a study of
fuel consumption by the type of locomotives that the ACC would use, use of system-average fuel
consumption is appropriate and is used here.

b. Servicing

Locomotive servicing includes the labor and material costs associated with servicing the
locomotives, including the costs of adding lube oil and sand. The parties agree on a cost of
$0.1649 per locomotive unit mile (LUM) for servicing locomotives. The Board’s SAC analysis
develops locomotive servicing cost by using the agreed-upon unit cost for servicing locomotives
in conjunction with the number of locomotives needed to serve the ACC’s traffic group.

4. Residual NS Distributed Power Locomotives

The parties agree that the ACC would operate its locomotives in a DP configuration. NS
included $22 million for retrofitting NS’s locomotives with the necessary equipment so that the
residual NS could operate in DP run-through service with the ACC. But as Duke points out,
NS’s proposed operating plan for the ACC assumed that residual NS locomotives would not
operate in DP service and would allow time for exchanging ACC and residual NS locomotives.
Because NS’s operating plan for the ACC is used here, there would be no need to equip residual
NS locomotives to operate in DP service. Therefore, this expense is excluded.

B. Railcars

There is a substantial difference in the parties’ estimates for the number of railcars that
would be required and the costs of acquiring those cars.

1. Railcar Requirements

Because NS’s operating plan has been accepted, that plan is used to estimate the number
of coal and grain cars that would be required. However, because of maintenance considerations,
cars would not be available 100% of the time and the ACC would need additional (spare margin)
cars. Duke assumes that the ACC would need a 5% spare margin, while NS assumes a 10%
spare margin based on the Board’s findings in prior SAC cases. Duke has failed to meet its
burden of proof, because it offered no evidence to support its 5% figure. Therefore, a 10% spare
margin is used.

2. Lease Expense

Duke and NS agree on the cost of leasing coal and grain cars. The agreed-upon unit costs
are used in the Board’s SAC analysis.

C. Train Crew Personnel

There is a substantial difference in the parties’ estimates for the number of train and
engine (T&E) personnel that the ACC would need. The operating plan is the prime determinant
of the number of T&E personnel. Therefore, the number of crew personnel specified by NS is
used here, as the ACC’s operations are based here on the plan proposed by NS. That crew
estimate is adjusted, however, to reflect that train crews could work 270 shifts per year.

D. Non-Train Operating Personnel

There is a significant difference in the parties’ estimates for the number of, and expenses
for, non-train operating personnel. Table C-4 shows the parties’ staffing requirements and the
figures used by the Board. The areas of dispute are discussed below.

Table C-4

Non-Train Operating Personnel

Duke

NS

STB

Train Manager

6

6

6

Asst. Train Manager

8

4

4

Trainmaster

0

27

27

Clerks

0

25

0

Fueling

0

10

0

Yardmasters

0

10

10

Carmen/Equipment Inspectors

54

72

72

Crew Callers

5

5

5

Dispatchers

18

21

18

Manager - Operations Control

5

0

5

Manager Locomotive Operations

4

7

7

Manager - Mech. Operations

1

3

3

Manager - Dispatch/Crew Call

0

6

5

Total

101

196

162

1. Train Managers, Asst. Train Managers and Trainmasters

Because the number of train managers, assistant train managers, and trainmasters is
primarily dependent on the operating plan, NS’s evidence is used.

2. Clerks, Yardmasters & Fueling

Duke did not include clerks because it claims that the ACC would have relatively few
supervisors and, therefore, there would be little need for clerks. NS added 25 clerks to provide
five positions with round-the-clock coverage, but did not explain why that number of clerks
would be necessary. Because Duke explained its exclusion of clerks, Duke’s evidence is
accepted.

Duke does not provide for yardmasters, claiming that the only yard activities would be
locomotive fueling and servicing, movements to and from contractor maintenance facilities, and
some bad-order car replacements. Because the operating plan used here would have a variety of
activities occurring in yards (including staging work to manage LTL shipments), yardmasters
would be required. Accordingly, NS’s staffing for yardmasters is the best evidence of record and
is used here.

Duke contends that contract employees would fuel locomotives; NS would have ACC
personnel perform that task. Duke’s proposal to use contract personnel is reasonable and is used
here.

3. Carmen/Equipment Inspectors

Duke proposed a somewhat lower number of inspectors than NS. While the disallowance
of Duke’s rerouting of cross-over traffic would eliminate the need for the ACC to inspect trains
at Winston-Salem, the trains would be inspected in Devon instead. The additional inspectors
provided for by NS would be needed to conduct those inspections. Therefore, NS’s evidence is
accepted.

4. Crew Callers

For crew calling, the parties agree that five positions would be needed. NS would also
add a management position. Duke has explained, however, that the manager of operations
control could provide the needed supervision. Therefore, Duke’s evidence is used here.

5. Dispatchers

The parties agree that four dispatchers would be needed at all times. Duke assumed that
18 dispatchers, working 250 shifts per year, could provide the needed coverage. NS would
include a manager for each shift. Again, Duke has explained that the manager of operations
control could provide the needed supervision. Therefore, Duke’s staffing estimate is used.

6. Operations Managers

Duke included five positions for operations control management, while NS would staff
these positions at an executive level. NS has not demonstrated a need for executive level staffing
at these positions. Therefore, Duke’s evidence is accepted.

Duke proposed four locomotive operations managers and one manager of mechanical
operations, while NS would provide for seven locomotive operations managers and three
managers of mechanical operations. Duke has not supported its staffing numbers, nor has it
provided any specific reason why NS’s proposed staffing is unrealistic. Therefore, NS’s
evidence is used here.

E. General & Administrative Personnel

The parties’ general and administrative (G&A) personnel estimates differ substantially
with respect to staffing levels that the ACC would need. Duke proposed a G&A staff of 59
employees for the ACC. Duke developed its proposed staffing on the basis of the experience of
its rail operations witnesses, who have held senior management positions at a variety of railroads
(including regional and start-up railroads). Duke’s plan includes limited in-house staffing, with
various financial, marketing, human resources (HR) and information technology (IT) functions
outsourced.

NS argues that Duke’s staffing levels would be insufficient for a Class I railroad (which
the ACC would be). NS proposed a staff of 140, based on a comparison with NS’s own
staffing levels. But NS has not adequately addressed the outsourcing proposed by Duke, which
would reduce the ACC’s staffing needs. Duke’s G&A staffing levels, which are based on the
experience of former senior-level railroad employees, are reasonable and supported, and NS has
not supported a need for the additional staffing it proposed. Therefore, Duke’s G&A staffing
levels are used here, with the exceptions noted below.

Table C-8

G&A Staffing

Duke

NS

STB

President/Exec. Dept.

3

4

3

Transp. & Engin. - Oper.

12

17

12

Finance & Accounting

20

46

24

Law, Admin. & H.R.

13

25

13

Marketing/Customer Service

11

48

11

Total

59

140

63

a. Outside Directors

The parties disagree on the size of the board of directors that the ACC would need.
Because the ACC would not be a publicly owned company, Duke contends that the board could
be limited to the ACC’s president, the vice-president of transportation, and one (uncompensated)
outside director. NS would include five outside directors. NS cites the New York Stock
Exchange requirement that outside directors comprise a majority of board members. NS also
points to the composition of the board for the Florida East Coast Railway Company (FEC), a
railroad that is smaller than the ACC would be but has a board consisting of ten members, nine
of whom are outside directors.

Duke’s proposal is unreasonable, as it would result in unconstrained managerial control
and oversight of the ACC. An organization of this scope would require significant independent
oversight of its management, regardless of whether it is publicly or privately held. Therefore,
NS’s proposal for five outside directors is accepted.

b. Information Technology

Duke provided for an IT staff of only nine employees, on the assumption that certain IT
functions would be outsourced. NS proposed a larger IT staff of 13, pointing out that Duke
failed to account for the cost of outsourcing any IT functions. Because Duke did not provide the
funds required for IT outsourcing, NS has provided the only evidence on the IT staffing
requirement if all operations were performed in house. Therefore, NS’s figure is used here.

F. Wages and Salaries

1. Crew Compensation

Both parties used NS’s 2001 Wage Forms A and B as a basis for estimating crew
compensation. However, they disagree on the basic wage and constructive allowance for crews,
as well as the number of taxi trips and overnight stays that ACC crews would require.

a. Basic Crew Wages

Duke developed basic crew compensation based on each train having an engineer and a
conductor. Furthermore, because Duke assumed that the ACC would provide only trainload
service, it used the compensation rate for “road” crew personnel. NS assumes that each train
would need two engineers. Because its operating plan for the ACC assumes yard as well as road
operations, NS assumes that crews would be compensated at a rate reflecting the wages of
“road,” “yard,” and “way” crews.

Duke’s assumption of one engineer and one conductor per train seems reasonable, and
NS has not explained why two engineers would be required. However, because the operating
plan used here includes yard operations, crew compensation should be based on a combination of
wages for road, yard, and way train operations. Therefore, the analysis here uses a combined
compensation rate for road, yard, and way train engineers and conductors, as set forth on the
wage forms relied upon by the parties.

b. Constructive Allowance

Duke included a constructive allowance of 8% to account for overtime, vacation and meal
expenses. Duke excluded allowances for certain benefits that it asserts would not be available to
the ACC’s non-unionized work force. NS would apply a 30% markup, based on data contained
in its 2001 Wage Forms A and B. NS’s constructive allowance is used here, as it is based on the
wage forms used by both parties to develop basic wages and Duke has provided no evidence that
non-unionized railroads do not pay these allowances. SeeTMPA at 104.

c. Taxi Expenses

The parties differ on the number and cost of taxi trips that would be required for ACC
crews. Because the number of taxi trips that would be needed is primarily dependent on the
operating plan, the number of trips estimated by NS is used here. Furthermore, NS’s $25 cost
per taxi trip is used, as Duke (the party with the burden of proof on this issue) offered no
justification for its $10 estimate.

d. Overnight Expenses

The parties agree on a $45 cost for overnight lodging and meals, but differ on the number
of overnight stays that would be required by T&E crews. The number of overnight stays is
determined by the operating plan, and NS’s operating plan is used here. Therefore, NS’s number
of overnight stays is used here.

2. Executive Compensation

Both parties used the executive salaries paid by FEC in 2001 as a standard for the
executive salaries for the ACC. The parties agree on the salary for the President/CEO. For the
salaries for other executive positions, Duke relied upon the individual position comparable to the
ACC position, while NS used the salary paid to FEC’s Executive Vice President for all executive
positions other than President/CEO. Because relying upon salaries tied to the duties of a specific
position is more reflective of the compensation for an individual job than relying upon a single,
one-size-fits-all salary, Duke’s evidence on executive salaries is used here.

The parties disagree on the amount for executive bonuses. Duke does not provide for any
bonuses, while NS calculates bonuses of approximately 70% of salaries. Because FEC’s base
compensation, which has been accepted, contemplated bonuses for its executives, bonuses are
appropriately included in executive compensation. However, NS’s calculation of bonuses, based
upon a 3-year average, is faulty given the rise in FEC’s base compensation during that period and
the corresponding decrease in bonuses. Because the 2001 bonuses of FEC executives are 45% of
salaries, this percentage is used to calculate the ACC executive bonuses.

3. G&A and Non-Crew Operating Compensation

Both parties used NS’s Wage Forms A&B to develop non-executive G&A and non-crew
operating personnel salaries. While NS stated that it agrees with Duke’s index for adjusting the
ACC base salaries from 2001 to the first quarter 2002, it used a different index. Because NS
has not explained why a different index is more appropriate, Duke’s index is accepted.
Accordingly, Duke’s estimates for non-executive staff salaries are used here.

With respect to non-train operating personnel, the parties again relied upon NS wage data
to develop their compensation estimates. Duke, however, made arbitrary adjustments to the
salaries. As the party with the burden of proof on this issue, Duke failed to support its
compensation levels. Accordingly, NS’s compensation levels are used here, except that the base
salaries are adjusted by the Wage Rate Index, rather than the Wage Rates and Supplement Index,
for the reasons set forth above.

4. Outside Directors

Duke assumed that an outside director would be a shipper or investor representative who
would have a direct interest in the ACC’s success and would thus be willing to serve on the ACC
board with only minimal compensation (for the travel expenses associated with attending board
meetings, discussed infra). NS proposed a salary of $30,000 a year for each director, but NS
failed to provide any basis for its salary proposal. Therefore, Duke’s evidence on this issue is
accepted.

G. Materials, Supplies, and Equipment

Materials, supplies, and equipment would be needed by various ACC personnel, such as:
motor vehicles, office furniture, equipment, utilities, outside services, IT hardware and software,
travel, and training. For items on which the parties agree, but the difference in their aggregate
cost figures are due to the difference in proposed staffing levels, the costs are restated to the
staffing levels found appropriate here and are not further discussed here. Likewise, decisions that
are driven by the use of NS’s operating plan are not addressed separately. The remaining
disputes are discussed below.

1. Vehicles

The parties disagree over the quantity and type of vehicles for use by the ACC’s staff.
Duke would provide the ACC’s supervisory personnel with Ford pick-up trucks. NS would
include the cost for a Ford Explorer to transport people and equipment. Given that pick-up
trucks are less expensive and could transport both supervisory personnel and cargo, Duke’s
proposal is reasonable and is used here.

For vehicles used for inspections, Duke included three pick-up trucks, while NS would
include eleven. Duke’s number is inadequate for the number of inspectors accepted here, and
therefore NS’s inspection vehicle estimate is accepted.

Duke would provide sedans for the ACC’s G&A staff, while NS would provide sport
utility vehicles. Duke did not include the costs of these vehicles in its operating expenses,
however. Thus, NS’s evidence is used here.

2. Computer Equipment and Software

The parties disagree on the price of software for a general accounting system. However,
as Duke points out and NS’s workpapers confirm, NS double-counted the cost of the software.
Therefore, Duke’s cost is accepted.

On opening, Duke did not include firewall protection for its computer systems. On reply,
NS included a firewall at a cost of $12,148. On rebuttal, Duke agreed that a firewall would be
required and proposed a cost of $3,000. Because Duke failed to account for a firewall in its
opening evidence and NS’s reply evidence is realistic, NS’s evidence of the cost of a firewall is
accepted.

On reply, NS contended that the network hardware proposed by Duke on opening would
be inadequate and it proposed alternative hardware. On rebuttal, Duke pointed out that its
specified equipment has the same functional capabilities as NS’s product. Duke has thus
supported on rebuttal the network hardware proposal set forth in its opening evidence.
Therefore, Duke’s network hardware proposal (including routers and printers) is accepted.
Because Duke’s network hardware is accepted, its network-related software expenses are used
here.

3. Travel & Entertainment

Duke provided no travel allowance for G&A personnel, on the ground that a regional
railroad such as the ACC would cover a limited geographic area and would maintain personnel
levels so as to minimize travel. Duke further claims that the $50,000 allowance for
miscellaneous expenses that the parties agreed upon could be used for travel. NS proposed travel
expenses equivalent to 20% of compensation for marketing staff and 10% for other G&A staff.
Given the size of the ACC, and the fact that the $50,000 allowance for miscellaneous expenses
would have to cover the travel expenses of the five-member board of directors and all other
personnel, Duke’s omission of travel expenses is not reasonable. As NS’s evidence on travel
expenses is the only evidence of record, NS’s travel allowance costs are accepted.

4. Annual Recruiting and Training Expense

Duke excluded annual training expenses for G&A personnel. NS argues that the ACC
would likely confront attrition rates of 5% to 6%, and thus would need to train new staff each
year. Aside from contending that turnover would be lower at the ACC (and thus annual training
would be minimal), Duke does not explain how it would provide for annual training expenses.
Expenses for training new staff is accepted, but the annual figure submitted by NS is adjusted to
reflect the ACC's reduced staffing estimates.

H. Start-Up Costs

Duke estimates that it would cost the ACC $4.5 million to hire and train its initial
personnel, whereas NS contends that it would cost $12.3 million. While the parties generally
agree on the cost for training an employee, they disagree on the number of employees that would
need to be hired and trained. NS would also include recruiting costs (fees paid to recruitment
agencies).

Duke argues that the ACC could draw on a pool of experienced NS employees that would
be displaced by the ACC’s replacement of a portion of the NS, obviating the need for the ACC to
pay recruiters to find qualified employees. That argument has been previously rejected. SeeTMPA at 84. It is inconsistent with the purpose of the SAC test to assume that the existence of
the defendant railroad would limit the costs the ACC would incur.

For rank-and-file personnel, however, it is inappropriate to include both training costs and
recruiting costs for the same people. TMPA at 85. Recruiting costs are generally incurred to
find skilled personnel who would not need extensive training. Because training costs are
included, it is unnecessary to include recruiting costs as well. After factoring in training costs for
rank-and-file employees and recruiting costs for skilled employees, the training and recruiting
costs for the ACC would be $8.0 million.

I. Ad Valorem Tax

The ad valorem taxes are driven by the configuration, and NS’s configuration for the
ACC is used here. Therefore, NS’s ad valorem tax estimates are accepted.

J. Loss and Damage

The parties agree on the loss-and-damage expense, and that estimate is used here.

K. Maintenance-of-Way

A summary of the MOW costs used here is set forth below in Table C-9.

Table C-9

MOW Costs

($millions)

Duke

NS

STB

Staffing

$4.714

$28.964

$28.964

Equipment

$0.136

$7.601

$7.601

Materials

$0.293

$3.505

$3.505

Maintenance Work

Track Geometry Testing

$0.096

$0.096

$0.096

Building Maintenance

$0.113

$0.150

$0.113

Snow Removal

$0.250

$0.250

$0.250

Derailments

$0.500

$1.000

$1.000

Weed Spray

$0.622

$0.693

$0.693

Yard Cleaning

$0.060

$0.083

$0.083

Storm Related Tree Work

$0.090

$0.200

$0.200

Shoulder BallastCleaning$0.450$0.450

$0.450

$0.828

$0.828

Crossing Paving

$0.210

$0.350

$0.350

Blasting Rock Slides

$0.010

$0.024

$0.024

Ultrasonic Rail Testing

$0.224

$0.530

$0.224

Rail Grinding

$0.199

$1.241

$0.199

Casualties

$0.000

$2.000

$2.000

Bridge Contract Work

$0.147

$1.000

$1.000

Storm Water Prevention

$0.000

$1.000

$1.000

Ditching

$0.125

$0.000

$0.125

Brush Cutting

$0.025

$0.000

$0.025

Ballast Undercutting

$0.700

$0.000

$0.700

Misc. Engineering

$0.375

$0.750

$0.750

Contract Labor

$0.852

$0.000

$0.000

Misc. Maintenance

$0.672

$0.000

$0.000

TOTAL Operatin

$10.864

$50.265

$49.730

1. Staffing and Equipment

The ACC would need a MOW department to perform day-to-day preventive (operating)
maintenance. Duke estimated this expense at $10.8 million, while NS estimated this expense at
$51.6 million. The majority of the difference in their estimates is due to how each party assumed
the MOW department would function and how many personnel would be required.

Duke contends that the ACC could perform the necessary operating maintenance with a
streamlined MOW department. It assumes that the ACC would contract out much of the routine
operating maintenance work. The ACC itself would employ only a small permanent force of
MOW employees to carry out routine inspections and maintenance, including some emergency
repairs. Those employees would be cross-trained, so that an individual ACC employee might,
for example, perform the functions of a welder one day, operate a machine the next day, and
arrange for deliveries of materials a day later.

NS argues that Duke’s MOW staffing plan is unrealistic, because such a highly versatile,
cross-trained labor force does not exist. NS further argues that Duke’s MOW plan understates
the amount of daily operating maintenance that would be required on the ACC. NS contends
that, because heavily loaded coal trains would be operating over severe curves and grades during
varying weather conditions, the ACC would need almost daily track inspections and significant
operating maintenance.

NS’s proposed MOW staffing levels are accepted as the best evidence of record. Duke
has failed to meet its burden of establishing that a small, cross-trained MOW staff would be
available and, even if available, whether such a limited MOW staff could provide the unplanned
day-to-day maintenance that would be needed by a Class I railroad the size of the ACC. In
addition, Duke does not attempt to reflect the higher compensation such skilled, cross-trained
workers would command.

Furthermore, on rebuttal Duke did not support its opening evidence, but instead increased
its original size of the MOW department by more than 60% (thereby conceding that its opening
MOW staffing was insufficient). However, Duke did not demonstrate that NS’s MOW staffing
would be unrealistic or infeasible. Thus, Duke’s alternative evidence on rebuttal is rejected, and
NS’s evidence is used here. NS’s estimate of the ACC’s equipment costs is also used, as the
amount of equipment that would be required is directly attributable to the railroad’s staffing
levels.

2. Materials

Duke calculates the materials for operating maintenance would be 5% of the cost of total
(operating and program) annual maintenance cost. NS estimates costs using a labor-based charge
for materials, of 30% of overhead. Duke’s materials estimate is rejected because it did not
explain how it determined that only 5% of maintenance materials would be consumed by
operating maintenance. Because Duke has failed to meet its burden of proof, NS’s figures are
used here.

3. Maintenance Work

The parties agree on the total cost for track geometry testing, building maintenance, snow
removal, and derailments. They also agree on the per-mile unit cost of weed spraying. But
their total spraying costs differ due to their different track configurations. The agreed-upon unit
cost for weed spraying is used here, in conjunction with the track configuration used in the
Board’s analysis to develop total spraying costs.

In its case-in-chief, Duke failed to include any funds for a variety of other work (yard
cleaning, storm related tree work, shoulder ballast cleaning, crossing paving, and blasting
expense for rock slides). On rebuttal, in response to NS’s evidence that such work would be
necessary, Duke included some funds for these purposes, but in each case, without any support,
Duke lowered NS’s cost estimates. Because Duke has not explained why NS’s estimates are
unrealistic and provided any support for its alternative estimate, NS’s evidence is used in the
Board’s analysis.

a. Ultrasonic Rail Testing

Duke used a unit cost of $90 per mile for semi-annual ultrasonic rail testing, based on a
third-party quotation. NS argues that Duke’s unit cost does not reflect the cost of frequent hand
checks that would be necessary in mountainous territory. NS also contends that testing would be
required three times per year. NS uses a unit cost of $187 per test mile, for a total cost of $0.5
million.

Duke’s ultrasonic rail testing estimate is accepted, because it is based on discussions with
a contractor. NS has not discredited Duke’s estimate, nor provided any support for its argument.

b. Rail Grinding

Duke and NS agree on a unit cost of $1,000 per mile for rail grinding. Duke would have
the ACC grind all 136-pound premium rail every 150 million gross tons (MGT) on curves
exceeding 3 degrees, and at 300 MGT on tangent track. Standard rail used in main tracks and
passing sidings would be ground at 50 MGT intervals.

NS argues that grinding would need to be performed more frequently due to the rigid
track structure of the ACC resulting from the use of steel ties. However, NS has provided no
support for its argument. Because Duke’s proposed rail grinding schedule (which is based on rail
grinding studies conducted by the Canadian National Railroad, and on the experience of Duke’s
expert witnesses) is adequately supported, it is used here.

c. Casualties

NS would add $2 million for casualty losses as a result of occurrences such as washouts,
floods, land slides, and slope failures, based on the mountainous territory the ACC would
traverse. NS states that the $1 million appropriated for derailments would not cover casualty
losses, citing its own incurrence of more than $11 million in total casualty losses across its
system in 2001. Duke claims that casualty loss expenses have been factored into its railcar lease
costs and that a separate expense for this is thus unnecessary. However, Duke has not supported
its claim that casualty costs are addressed in rail car leasing costs. Therefore, that additional
expense is included here.

d. Bridge Contract Work

Without any explanation, Duke included $147,000 for bridge maintenance work, while
NS would include $1 million. NS’s estimate is accepted because Duke failed to meet is burden
of proof by not presenting any evidence supporting its position.

e. Storm Water Prevention

NS included $1 million for addressing storm water. Duke has not commented on this
cost. NS’s cost is therefore accepted as unopposed.

f. Ditching, Brush Cutting and Ballast Undercutting

Duke included $125,000 for ditching, $25,000 for brush cutting, and $700,000 for ballast
undercutting. NS has not addressed these issues. Thus, Duke’s estimates are accepted.

g. Miscellaneous Engineering

Neither party discussed or supported its costs for this category. Because Duke failed to
meet its burden of proof, NS’s estimate of $750,000 is used.

h. Contract Labor

Duke included $852,000 for contract labor. However, because Duke’s proposed use of
contract labor to provide the required MOW staffing for the ACC is rejected, there is no need for
a contract labor expense. The ACC would use in-house staffing for operating maintenance.

i. Miscellaneous Maintenance

Duke included $672,000 for miscellaneous maintenance, but did not specify what costs
are included. NS would not include miscellaneous costs. Because all of the necessary costs for
maintaining the line have been included in other cost categories, NS’s position that costs are not
needed here is accepted.

L. Insurance

The parties agree that insurance costs would be 2.5% of operating expenses. The agreed-upon procedure for estimating insurance costs is used here.

M. Trackage Rights Fee

The ACC would operate over the lines of the Vaughan Railroad under the same trackage
rights agreement currently used by NS. The parties agree that the ACC would pay to use these
facilities on the same terms as NS currently does.

While NS stated that it paid the Vaughan Railroad a certain amount per net ton for the use
of these trackage rights in 2001, upon review of NS documents, Duke noted that NS paid a
significantly lower amount per ton in 2001. As Duke provided the only probative evidence
showing actual payments made by NS for use of the Vaughan Railroad tracks in 2001, Duke’s
per ton figure is accepted.

APPENDIX D – ACC ROAD PROPERTY INVESTMENT

This appendix addresses the evidence and arguments of the parties concerning what it
would cost to build the ACC. Table D-1 summarizes both the parties’ cost estimates associated
with that construction and the numbers used here, which total approximately $3.6 billion.

Table D-1

ACC Construction Costs

($ millions)

Duke

NS

STB

A. Land

$63.5

$120.7

$105.6

B. Roadbed Preparation

460.6

1,452.3

714.1

C. Track Construction

690.8

885.4

771.0

D. Tunnels

315.2

581.3

414.5

E. Bridges

285.8

782.4

703.3

F. Signals & Communications

116.4

167.3

149.3

G. Buildings & Facilities

18.4

46.0

39.0

H. Public Improvements

3.6

56.7

39.6

I. Mobilization

12.3

100.9

78.9

J. Engineering

128.6

530.2

294.2

K. Contingencies

151.2

397.3

283.1

L. Off-System Investment*

0.0

0.0

0.0

TOTAL**

$2,246.4

$5,120.2

$3,592.7

* NS had originally included $30.1 million for the additional investment that the residual NS
would need to accommodate the reroutings originally proposed by Duke that are disallowed
here.

** Columns may not sum to totals because of rounding.

A. Land

For those portions of the ACC that would follow an existing NS line, the parties’
estimates for the total amount of land that the ACC would need differ only slightly. However,
as shown in Table D-2, there is a substantial difference in the land values used by the parties.

Table D-2

Real Estate Costs

Duke

NS

STB

ROW

Inspected by NS

$38,615,033

$71,765,991

$71,765,991

Not Insp. By NS

22,031,680

30,052,451

22,031,680

Easements

655

0

655

Yards

2,638,765

12,452,554

11,761,074

TOTAL

$63,286,133

$114,270,996

$105,559,400

For valuation purposes, Duke physically inspected 89% of the existing NS ROW; for
inaccessible areas, Duke used a variety of mapping sources to develop land costs. Duke divided
the ROW into 80 large segments (averaging 13.5 miles in length) and valued each segment based
on the value of unimproved land in the general area.

NS asserts that Duke’s method of dividing the ROW into large segments in urban areas
leads to flawed estimates, because long stretches of land cannot be assumed to have entirely
uniform characteristics in such areas. NS inspected 7.3% of the ROW (located in the Roanoke,
Winston-Salem and Charlotte areas) and assigned values to each segment based on a physical
inspection and an analysis of local land sales. For the remaining 92.7% of the ROW which it did
not inspect, NS simply increased Duke’s land values based on the ratio of NS’s valuation to
Duke’s valuation for areas that both had inspected.

For the segments of the ACC route that both Duke and NS inspected (totaling 985.50
acres of land), NS’s valuation method is superior. Because NS used a greater number of
comparable sales, it provided a more complete, and thus more accurate, representation of
market values. Moreover, NS’s procedure of examining parcels along the ROW is superior to
Duke’s procedure of valuing land in the general area. The land along the ROW is a prime
indicator of a ROW’s value and has been used in all prior SAC cases.

For the segments of the ACC route that NS did not inspect (totaling 12,110.20 acres of
land), Duke has provided the best evidence. NS’s approach is unacceptable. NS has provided no
basis for its assumption that the relationship between the two appraisals for urban land prices is
equally applicable to rural land values.

Finally, Duke included a one-time easement payment (totaling $655) for 71.3 acres of
land, based upon the terms upon which NS now uses that land. Board policy in SAC cases is to
assume that the SARR could acquire the same interest in property as the incumbent railroad has.
Therefore, Duke’s easement acreage and cost for this land are accepted.

B. Roadbed Preparation

To prepare the land for rail operations, the land would have to be cleared of vegetation,
then the earth and rock would need to be graded into a suitable railroad right-of-way. Drainage
and erosion control measures would also have to be taken to protect the track structure. The
table below shows the parties’ estimates for the costs necessary to prepare the ACC roadbed, as
well as the numbers used here.

Table D-3

Roadbed Preparation Costs

($ millions)

Duke

NS

STB

Clearing

$21.57

$50.54

$22.01

Grubbing

4.49

9.32

4.58

Earthwork

417.87

1102.38

522.89

Drainage

Lateral Drainage

0.47

0.60

0.47

Yard Drainage

1.10

8.11

1.08

Culverts

39.94

52.66

35.56

Retaining Walls

12.65

180.49

119.02

Rip Rap

1.05

2.06

2.04

Relocation of Utilities

0.08

0.08

0.08

Seeding/Topsoil Placement

2.27

1.76

1.76

Water for Compaction

0.00

9.10

0.00

Waste Excavation

0.47

Surfacing for Roads

0.17

0.17

0.17

Erosion Mitigation

Silt Fences

0.04

1.07

1.07

Slope Drains

0.00

2.71

2.71

Environmental Mitigation

0.10

0.10

0.10

TOTAL*

$501.57

$1,452.34

$713.94

* Columns may not sum to totals because of rounding.

1. Clearing and Grubbing

The parties used the ICC Engineering Reports (Engrg Rpts) to determine the amount of
land that would need to be cleared and grubbed. The parties disagree on the cost to clear and
grub land, due to their differing assumptions regarding the number of tracks at particular
locations and the size of trees to be removed. The parties’ estimates also differ due to the
application of a location adjustment factor and cost adjustment index.

The parties’ clearing and grubbing quantities are restated based on the findings relative to
the number of track miles the ACC would require. SeeAppendix A – ACC Configuration.
While both parties used the R.S. Means Manual (Means) as a basis for their clearing and
grubbing unit costs, Duke used costs for removal of 12-inch-diameter trees, whereas NS used
costs for 24-inch-diameter trees. Because Duke inspected portions of the NS route that the ACC
would replicate and determined that trees in the area were generally 12 inches in diameter or less,
while NS provided no support for assuming that 24-inch trees would need to be removed, the
cost for removing 12-inch-diameter trees is used.

The parties agree on the location adjustment factor, but NS used a hard-coded value in its
spreadsheet. Because it is necessary to restate the parties’ estimates, Duke’s approach of
incorporating a formula in the spreadsheet for the adjustment is used. Moreover, Duke’s
indexation procedure appropriately reduced the mid-year 2002 Means costs to reflect the lower
prices in effect at the beginning of 2002, the startup date of the ACC. In contrast, in developing
costs for the beginning of 2002, NS’s indexation procedure erroneously increased, rather than
decreased, the Means mid-year 2002 costs. Accordingly, Duke’s clearing and grubbing cost
figures ($3,437 and $2,298 per acre, respectively) are used here.

2. Earthwork

As noted above, the parties agree upon the width of the right-of-way (100 feet, except in
urban areas, where a 75-foot wide ROW would be used), the roadbed side slope (1.5:1), and the
size of drainage ditches (2 feet wide by 2 feet deep). But they disagree on the extent of access
roads that would be needed, the amount of grading that would be needed for the yards, for the
Dan River branch, and for tunnel daylighting, and the earthwork equipment that would be
required. These disputed elements are discussed below.

a. Access Roads

Duke excluded costs for access roads, claiming that they would be unnecessary. NS
argues that the ACC would need to construct 54,427 feet of access roads to transport labor,
materials, and equipment to remote railheads and to improve access to remote culvert, tunnel,
and bridge sites along the route.

In past SAC cases, the cost of access roads have not been included where such roads did
not exist when the line that the SARR would replicate was originally built or the carrier did not
incur the costs of building such roads. Here, NS has provided no evidence that it (or its
predecessors) incurred any costs for access roads. Moreover, as Duke points out, remote areas
could be reached by using the cleared ROW. Therefore, costs for access roads are not included
here.

b. ACC Yards

For yards that would replicate existing NS yards, both parties based grading requirements
on an average fill height of 1 foot, based on Engrg Rpts. However, the parties disagree on the
amount of earthwork that would be needed for new yards. Duke assumed that new yards would
have the same fill requirement as NS’s existing yards. NS calculated the grading for new yards
using the method it used for grading of the main line.

There is no apparent reason, and NS has not explained, why the amount of grading in new
yards would be different from what has historically been undertaken in existing yards. Therefore,
Duke’s method of calculating earthwork quantities for new yards is accepted.

c. Dan River Branch

The Dan River branch line is the only part of the ACC that would not follow an existing
NS route. NS claims that the shorter route proposed by Duke is not feasible because 5 miles of
that line would be subject to flooding and the potential for washouts of the line. NS argues that,
to make this branch line feasible, the ACC would have to construct a trestle to protect the rail
line from flooding. Duke maintains that the risk of flooding would be minimal and that, in any
event, short periods of flooding would not adversely affect the power plant. Duke notes that the
Dan River branch would be a low-use line, carrying only four loaded trains a month, so that any
disruption to service would not have serious impacts on either the carrier’s or shipper’s
operations.

Short periods of interrupted service might not affect the production of power at the
shipper’s plant. However, Duke has provided no assurance that flooding would not wash out
portions of the line, causing rail service interruptions for extended periods of time—a risk that
the shipper does not currently face because NS’s route does not follow the Dan River. A SARR
must be able to provide a shipper with service as reliable as that provided by the incumbent
railroad. Therefore, because Duke has chosen to route the ACC along the Dan River, further
measures to protect the line would be necessary and construction of a trestle is the only
alternative offered on this record that would protect the shipper from service interruption from
flooding.

Duke initially estimated that 1.2 million cubic yards (CY) of earthwork would be
necessary for the 8-mile section of the Dan River branch between the point at which NS would
have the ACC construct a trestle bridge and the connection with the main line at Stoneville. On
reply NS identified several errors in Duke’s calculation, and then, without providing any support,
assumed that 1.4 million CY of earthwork would be required. NS also argued that construction
of the Dan River Branch would require the relocation of three holes on a local golf course and
condemnation and purchase of four homes at a combined cost of $1.3 million ($300,000 for each
hole and $100,000 for each home). On rebuttal, Duke conceded that its initial computation
contained several errors and that, after correcting for those errors, 1.33 million CY of earthwork
would be required. However, Duke argued that the other expenses asserted by NS would not be
needed, as its witness physically inspected the proposed ROW and found that the rail line would
skirt the golf course and that no homes would need to be relocated.

Because NS did not provide support for the earthwork estimate contained in its
spreadsheet, Duke’s rebuttal evidence correcting for errors in its initial earthwork estimate is
accepted and used here. Furthermore, Duke’s assertion that neither the golf course nor homes
would be disturbed by construction of the line is accepted as it is based on an actual inspection of
the area.

d. Tunnel Daylighting

Duke and NS disagree on the amount of earthwork that would be associated with
installing daylighted tunnels along the ACC route. Duke assumes that the ACC would daylight
any terrain that would require 500 linear feet (LF) or less of excavation. It argues that modern
earthmoving and excavation equipment now make it less expensive to create open cuts on the
ACC route than when the NS line was built, when it was more economical to construct tunnels.
While not disputing that daylighting would be appropriate, NS asserts that Duke assumed an
inappropriate side slope for the cuts, and thus understated earthwork quantities by an average
of 49%. In addition, NS assumes that certain of the daylighted tunnels would be double-tracked
and that such tunnels would cost 75% more than similar length single-tracked tunnels.

As Duke points out, the reference manual Railroad Engineering by William H. Hay
recognizes that cuts can have the side slopes proposed by Duke. Duke also notes that it provided
for 10-foot benches for every 30 feet of vertical height excavation to make the cuts even more
stable. Because Duke’s proposed side slopes for daylighted tunnels are reasonably supported,
they are used here. However, because NS’s configuration for the ACC is used (resulting in the
double-tracking of certain lines) and because Duke has not addressed NS’s 75% markup for
excavating double-track daylighted tunnels, NS’s markup is used here where double-tracking
would be needed.

e. Grading Costs

The Engrg Rpts classify earthwork into various types: common excavation, loose rock,
solid rock, or borrow (material moved to the construction site for fill). In determining the
relative amounts of solid rock and loose rock areas along the ACC, Duke assumed, as has been
the assumption in many prior SAC cases, that 50% of the area classified as solid rock in Engrg
Rpts would actually be rippable using modern equipment. NS maintained that much of the rock
classified by Engrg Rpts as solid rock would still be classified as solid rock and require blasting
rather than removal by modern ripping equipment. NS pointed out that the ACC would traverse
the Appalachian mountain range and provided a geologic description of the large masses of solid
rock that would be encountered in constructing tunnels. Based on its tunnel study, and Duke’s
assumption that 90% of the material encountered in daylighting tunnels would be solid rock, NS
concluded that 90% of the material classified in Engrg Rpts as solid rock would need to be
removed by blasting.

The analysis here assumes, as Duke does and as the Board and parties have in prior cases,
that 50% of the material classified in Engrg Rpts as solid rock would be rippable using modern
construction equipment. First, NS misinterpreted Duke’s evidence. While Duke did assume that
90% of the rock encountered in daylighting tunnels would be solid, it further assumes that half of
such rock could be removed with modern ripping equipment. Moreover, NS has provided no
support for its assumption that 90% of the solid rock portions of the ROW other than tunnels
would require blasting. Finally, NS has elsewhere acknowledged that “most of the
mountainous areas [that the ACC would traverse] contain hard shale rock”, a material that
NS’s own workpapers indicate is rippable. Because the record indicates that much of the solid
rock would be rippable, Duke’s position that 50% of solid rock would be rippable using modern
equipment is the more reasonable assumption here.

In its case-in-chief, Duke proposed a mix of earthwork equipment for use in various soil
conditions. NS generally agrees that the equipment proposed by Duke for excavating common
earth would be appropriate for the portion of the ACC south of Roanoke, except that NS
contends that bulldozers, in addition to the scrapers proposed by Duke, would be needed to
spread graded material. The Board has previously determined that scrapers can effectively
spread graded material and that bulldozers would not be necessary. Accordingly, NS’s
proposal for additional bulldozers south of Roanoke is rejected.

For grading the ACC through areas of loose and solid rock, NS contends that the
equipment proposed by Duke would be inadequate, and NS has proposed a different mix of
larger, more powerful earthwork equipment. On rebuttal, Duke acknowledged that some of the
equipment in its initial proposal for grading loose and solid rock would be inadequate, and it
proposed a mix of equipment that is different both from what it initially presented and from what
NS proposed.

Having failed in its opening evidence to account for the difficulty of grading areas of
solid and loose rock in mountainous terrain, Duke is limited in what it may present on rebuttal on
this issue. Duke objects to NS’s unsupported, rough terrain markup for grading the line north of
Roanoke. Because NS has not established the need for such an adjustment, it is rejected. In
addition, Duke has shown that some, but not all, of the equipment proposed by NS would be
unrealistic. Duke points out that the backhoe-type equipment NS designated for grading the
ROW is equipment that is designed primarily for trenching and is relatively inefficient for
performing other types of excavation; thus it would likely not be used for the grading of a
railroad ROW. Therefore, Duke’s rebuttal proposal to use a power shovel, equipment more
suited for excavation than a backhoe, is used here. However, Duke has not shown that the larger
bulldozer that NS specifies for ripping rock in the mountainous terrain north of Roanoke is
unrealistic. Furthermore, Duke now concedes that its proposal to use over-the-road dump trucks
for moving excavated material was flawed. But Duke has not shown that NS’s proposal to use a
22 cubic yard, off-road dump truck to move excavated material is unrealistic and would not be
used. While Duke’s rebuttal proposal to use a 42 cubic yard off-road dump truck would have
been appropriate to propose on opening, it is not appropriate rebuttal in light of NS’s realistic
alternative. Therefore, NS’s bulldozer and dump truck proposal is used here.

For solid rock excavation, because much of the ACC would be in remote areas requiring
significant drilling and blasting, Duke used an average of the costs for “bulk drilling and
blasting” and “drilling and blasting over 1,500 cubic yards.” NS objects to inclusion of bulk
drilling and blasting costs, which it contends represents the lowest possible cost for blasting and
pertains to quarry operations. However, the bulk drilling and blasting cost used by Duke is not
the minimum cost for such activities, but rather an average figure for blasting large quantities of
rock. Moreover, there is no indication that the figure used by Duke pertains only to quarry
operations. In fact, Means has a separately listed cost for drilling and blasting in pits, which
would seem to apply to quarry operations. Therefore, Duke’s unit cost for blasting is reasonable
and is used here.

Duke excluded costs for undercutting and fine grading, claiming that they would not
be necessary. NS would include costs for both, arguing that unsuitable material must be removed
to provide a structurally sound roadbed, and that fine grading is required to efficiently shape the
roadbed to the required slope. However, given NS’s showing that much of the ROW would be
constructed in solid rock areas, there should not be much need to remove soft, structurally
unstable soil. Furthermore, NS has not explained why the normal grading activities would not
include fine grading. Therefore, the analysis here does not include such costs.

Finally, Duke and NS disagree on the amount of land (925 acres versus 980 acres) that
would be required to dispose of waste material generated during the grading process. Because
Duke’s lower earthwork quantities are generally accepted, Duke’s figure for the amount of land
needed for waste material is also accepted.

3. Drainage

The parties offer different cost estimates for installing drainage along the ROW and in
yards.

a. Lateral Drainage

Duke would have the ACC install lateral drainage along the ACC ROW at the same time
as the other roadbed excavation is performed. In contrast, NS would have the ACC install the
drainage by re-excavating after completion of the initial roadbed grading, and NS would also
include costs for geotextile fabric and for hauling away excavated materials.

In prior SAC cases, it has been found that the more efficient construction procedure
would be to install drainage at the same time as the other excavation work would be
performed. NS has not demonstrated why that procedure would be infeasible for the ACC. In
addition, NS has not shown why geotextile fabric would be necessary. Therefore, Duke’s
evidence on lateral drainage is used here.

b. Yard Drainage

Duke did not include in its case-in-chief any cost for installing yard drainage. While NS
does not discuss the need for yard drainage, its electronic spreadsheets include $8.1 million for
such investment. On rebuttal, Duke conceded that yard drainage would be necessary, but it
argued that the investment proposed by NS is excessive and not typically used for rail yards.
Duke now includes $1.1 million for yard drainage.

Because NS did not discuss why such a high level of investment would be needed, and
because Duke points out that the elaborate drainage system shown in NS’s workpapers is not
generally used by railroads, Duke’s rebuttal proposal for yard drainage, which appears
reasonable, is used here.

4. Culverts

The parties generally agree that culverts would be used, instead of bridges, to span spaces
of less than 20 LF. They disagree, however, on the number of culverts that would be appropriate
and on the costs associated with installing them.

a. Quantity

NS argues that the choice between bridges and culverts is not driven by length alone, but
must also take into consideration underpass roadway clearances and required hydraulic opening
size. NS submits that there are several locations where only a bridge would suffice. Because
Duke does not contest NS’s evidence that culverts would be unsuitable for certain locations,
NS’s estimate of the number of culverts is used here.

b. Costs

Duke’s cost evidence is based on the use of galvanized corrugated metal pipe culverts
similar to those used on the existing NS ROW that would be replicated by the ACC. Duke also
specified precast reinforced concrete box (RCB) culverts to replicate the cast-in-place RCB
culverts that are in place along the NS ROW. Duke did not include wing walls, headwalls and
scour pads on the RCB culverts, as NS’s culverts generally do not have such features. Duke also
excluded costs for stream diversion, claiming that its method of siting culverts early during the
construction process would obviate the need for diversion.

NS asserts that the ACC should use bituminous coated, thicker gauge pipe in order to
deter corrosion. NS would also have the ACC use cast-in-place RCB culverts, arguing that the
terrain would make it difficult to move precast culverts to where they would be needed. In
addition, NS would have the ACC add wingwalls, headwalls and scour pads to culverts. Finally,
NS would include costs for stream diversion during construction of the ACC.

Non-coated corrugated metal pipe and RCB culverts without wingwalls, headwall, or
scour pads should be sufficient for the ACC, given NS’s use of such culverts on its existing line.
Furthermore, Duke has satisfactorily explained that the ACC could move precast culverts over
the ROW after it was cleared and that early siting of culverts would eliminate the need for stream
diversion. Accordingly, Duke’s evidence on culvert costs is used.

5. Retaining Walls

The parties differ significantly in their estimates of the number of, and cost associated
with constructing, retaining walls along the ACC ROW. On opening, Duke included costs for
soil stabilization gabions (wire mesh containers filled with stone) in place of the masonry
retaining walls listed in Engrg Rpts, but on rebuttal Duke conceded that the ACC would need
additional gabions to replicate other types of retaining walls identified in Engrg Rpts. Duke
included no costs for handling or acquiring aggregate material to fill the gabions, arguing that the
rock excavated during construction of the roadbed could be used.

NS argues that the ACC would need to use structurally stronger retaining wall gabions.
In addition, NS would increase Duke’s retaining wall quantities to reflect the higher walls
necessitated by the ACC’s use of a wider roadbed than that reflected in Engrg Rpts and to
account for walls added to the ROW after Engrg Rpts were compiled. Finally, NS would include
costs to transport, stockpile, and grade the stone used to fill the gabions.

Given Duke’s proposal to use gabions for retaining walls, the ACC would need to
purchase gabions that are specifically suited for this purpose. Also, the quantity of retaining
walls shown in Engrg Rpts would need to be increased to account for the ACC’s wider roadbed.
As roadbed width increases on sloping terrain, retaining wall height would also need to increase.
Furthermore, even if local rock were used, it is reasonable to assume that the ACC would incur
costs to handle and sort the rock in order to have materials suitable for preparing structurally
sound gabions. Thus, the analysis here includes these costs. However, NS has not demonstrated
that the costs must be increased to reflect walls installed after the Engrg Rpts. While NS claims
to have provided photographs showing post-Engrg Rpts walls, the pictures cannot be located in
the record and therefore their probative value cannot be assessed.

6. Rip Rap

Duke included only the costs to place rip rap, not any costs for acquiring, transporting,
sorting, grading and stockpiling materials for rip rap. Duke asserts that the ACC would collect
material from nearby blasted or ripped rock and that the ACC would place this material using
equipment already present. Duke contends that, because rip rap can include a wide variety of
rock sizes, sorting and grading would be unnecessary.

Duke has offered no evidence, however, to support its assumption that rock would be
readily available at each location requiring rip rap and that there would be no additional cost
associated with the construction crews gathering and stockpiling the needed rock material.
Therefore, the analysis here uses NS’s evidence, which includes costs to handle, stockpile and
transport rip rap.

7. Relocation of Utilities

The parties agree on the cost ($75,491) that would be incurred for the relocation of
utilities along the ACC’s Dan River branch. They also agree that, consistent with Board
policy, such costs should not be included for any other segments of the ACC, as NS and its
predecessors did not incur such costs.

8. Seeding/Topsoil Placement

Duke included costs for seeding and topsoil placement in areas where NS has incurred
such costs and on the Dan River branch. Duke relied upon the quantities reported in Engrg Rpts,
except for the Dan River branch, for which Duke (using Means) developed a quantity based on
13 miles of roadbed and a 100-foot-wide ROW.

NS disputes only the quantity of seeding and topsoil placement that would be required for
the Dan River branch. NS would include such costs for only the 8-mile portion of the line that
would not be subject to flooding while Duke included costs for the entire 13-mile line. Because
the Board’s SAC analysis incorporates NS’s suggestion for building a trestle on 5 miles of the
line, seeding and topsoil would be needed for only 8 miles of the line. Accordingly NS’s cost
evidence is used here.

9. Water for Compaction

NS would include $9.1 million to cover the cost of one water truck for every 3-5 dozers,
arguing that this water would be required for compacting soil. Duke did not include any cost for
water for compaction, arguing that soil in the eastern United States has sufficient water content to
allow for compaction. As support, Duke provided rainfall charts for West Virginia and North
Carolina.

The area traversed by the ACC is not particularly arid, and NS has provided no evidence
demonstrating the need for additional water or showing that it uses water for compaction in its
own construction projects. Therefore, no cost for water for compaction is included here.

10. Road Surfacing

The parties both use a cost figure of $168,977 for surfacing detour roads along the Dan
River branch. While NS argues that the ACC would also incur road resurfacing costs for all road
crossings shown in Engrg Rpts (2,767 grade crossings), its evidence only includes the cost for
surfacing roads on the Dan River branch. Therefore, that is the only cost included here.

11. Erosion Mitigation

The parties agree on the cost for silt fences that would be used during construction of the
Dan River branch. Duke did not include such costs for the remainder of the ACC, however,
arguing that they are an environmental remediation cost and as such constitute a barrier-to-entry
cost that should be excluded from the SAC analysis. To the contrary, the cost of silt fences
should be included in the ACC investment base, because such fencing is a modern construction
technique needed to preserve the newly constructed roadbed and to prevent accumulation of silt
in newly installed culverts or drainage ditches. Absent such fences, additional costs would be
incurred to address the damage from runoff.

Duke also excluded costs for slope drains, claiming that NS or its predecessors did not
incur costs for such drains when constructing the existing ROW. Again, however, this cost
should be included, because slope drains are simply a modern construction practice necessary to
avoid the added expense of reworking slopes after heavy rains.

C. Track Construction

A variety of materials would be needed to assemble the tracks of the ACC. Table D-4
summarizes the cost estimates associated with this aspect of constructing the ACC.

Table D-4

Track Construction

Duke

NS

STB

Sub-ballast

$49,523,986

$65,103,181

$54,601,380

Ballast

25,947,202

60,873,902

28,109,423

Ballast Offloading

0

16,535,424

0

Geotextiles

628

8,908,409

5,175,761

Steel Ties (12mm)

85,375,471

95,138,139

92,907,529

Steel Ties (10mm)

48,341,057

59,059,201

55,577,514

Timber Ties

4,183,031

7,047,399

6,003,015

Transition Ties

0

2,173,500

2,173,500

New Rail

95,278,634

116,036,196

95,986,312

Relay Rail

51,537,816

62,693,857

58,907,951

Rail Offloading

0

8,349,229

0

Field Welds

500,664

3,082,625

516,587

Joint Bars

698,425

1,000,616

852,339

Insulated Joints

109,920

678,000

144,640

14 Inch Tie Plates

2,371,356

3,015,631

3,367,890

18 Inch Tie Plates

0

1,315,136

0

6 Inch Spikes

206,205

360,671

321,809

Rail Anchors

124,518

221,375

190,286

Spring Clip Assemblies

115,180,085

129,493,146

127,472,385

Switches

17,245,420

43,050,622

24,762,680

Rail Lubricators

4,446,016

4,352,544

4,352,544

Track Construction

189,745,614

207,669,240

205,710,688

TOTAL*

$690,816,048

$896,158,043

$767,134,233

* Columns may not sum to totals because of rounding.

1. Sub-ballast and Ballast

The parties agree on the use of 8 inches of sub-ballast and 12 inches of ballast for main-line track, and on a sub-ballast cost of $8.03 per cubic yard. They disagree on the need for sub-ballast in yards, the quantities of sub-ballast and ballast needed, the unit cost of ballast, and costs
for transporting and offloading ballast.

a. Yards

Duke would have the ACC install 10 inches of ballast in yards (and on spur lines and set-out tracks). Duke argues that 10 inches of ballast over 1 foot of compacted fill would provide
sufficient support for the track structure, and Duke has provided evidence demonstrating that the
pressure exerted on the subgrade would be well below the American Railway Engineering and
Maintenance-of-Way Association (AREMA) maximum loading specifications. NS would
have the ACC install 6 inches of sub-ballast in yards and under set-out tracks, in addition to 10
inches of ballast, because of the heavy axle loads of ACC trains, poor soil conditions, and Duke’s
exclusion of geotextile fabric in the yards.

Duke’s reliance on the AREMA industry standards is reasonable, and NS has failed to
explain why those standards would not be appropriate to use here. Therefore, no cost for sub-ballast in yards is included here.

b. Quantities of Material

Duke’s calculation for quantities of sub-ballast and ballast excluded the area occupied by
ties embedded in the ballast. NS presented its own calculations for the quantities of sub-ballast
and ballast. Duke’s calculation is more accurate, however, as it recognizes that ties and ballast
cannot occupy the same area.

In determining the amount of rock the ACC would require, Duke used a conservative
conversion factor of 1.5 tons/cubic yard for sub-ballast and ballast, based on a published 1.325
tons/cubic yard conversion factor for compacted granite ballast. NS used conversion factors of
1.76 tons/cubic yard and 1.62 tons/cubic yard for sub-ballast and ballast, respectively. Duke’s
1.5 tons/cubic yard conversion factor is used here because it is based on a published reference,
whereas NS’s conversion factors are unsupported.

c. Unit Costs

Duke based its ballast cost figure on information obtained from NS in discovery. NS
restated Duke’s unit cost for ballast to include transportation costs from quarries to the work
sites. However, the data on ballast costs that NS supplied to Duke in discovery indicate that the
cost included delivery to the railroad. Therefore, the transportation costs added by NS are a
double count and should be excluded. Duke’s cost figure of $4.51 per cubic yard for ballast is
accepted.

NS would also add a separate ballast offloading cost of $16.5 million for the labor and
equipment needed to move the delivered ballast onto the track structure after the laying of the
rail. Duke argues that the contractor responsible for track construction would offload the
material. It is reasonable to assume that a quote from a contractor for laying the track and
installing the ballast would include the cost for placing the ballast along the ROW. Therefore, a
separate offloading cost is rejected.

2. Geotextile Fabric

Duke would place geotextile fabric only under switches and crossings on the Dan River
branch line. Duke reasons that, because geotextile fabric was not developed until 1968 and
virtually all of the NS lines that would be replicated by the ACC were built before that time, the
cost of geotextile fabric should be excluded from the SAC analysis, as an expense that NS has
not itself incurred.

NS argues that it is current standard railroad practice to use geotextile fabric to improve
roadbed stabilization in locations subject to diverse lateral forces (such as turnouts and road
crossings) and locations with poor subgrade quality, and that failure to include geotextile fabric
would increase the need for spot surfacing. NS further argues that Duke’s proposal to use steel
ties would increase the need for geotextile fabric, because more lateral force is transmitted to the
subgrade under steel ties. Accordingly, NS would have the ACC include geotextile fabric costs
for all turnouts and crossings, for all curves greater than 6 degrees, and for 10% of the remainder
of the ACC to account for poor soil structure. NS would use a unit cost of $1.15 per square yard
delivered, and it would add labor, overhead and profit based on Means.

As the parties in prior SAC cases have acknowledged, the installation of geotextile fabric
under all turnouts and crossings is now a standard practice and, as such, its cost is properly
included in the SAC analysis. However, because NS has not shown that geotextiles would be
required under steel ties or that it has installed geotextile fabric elsewhere on its own system, this
cost is included here only for turnouts and crossings on the ACC.

3. Ties

Duke and NS would include $137,899,559 and $163,418,239, respectively, for ties.
The parties agree that the ACC would be constructed with heavy-duty (12mm) steel ties for main
lines, and industrial duty (10mm) steel ties for spur lines and light-duty connecting tracks. They
agree on a tie spacing of 24 inches for tangent track and on curves of 6 degrees or less. They
would use industrial-grade wood ties in yards and for set-out tracks. The parties also agree on a
wood tie cost of $20 per tie, with a transportation allowance of $1.50 per tie, and on the cost of
steel ties and associated hardware. However, they do not agree on the need for or cost of
transition ties, the inclusion of transloading costs for steel ties, and tie spacing on curves
greater than 6 degrees. Each of these issues is discussed below. The remaining difference in the
parties’ cost estimates is due to the difference between their network configurations. The parties’
tie requirements are restated based on the network configuration accepted in Appendix A – ACC
Configuration.

a. Transition Ties

In its case-in-chief, Duke did not include a cost for transition ties. On rebuttal, Duke
agreed to the use of transition ties on main line switches; however, Duke would not place
transition ties at approaches to yards and bridges. Also, Duke would use 12' x 7" x 9" ties as
transition ties, in place of the specialized transition ties proposed by NS.

While Duke acknowledges that transition ties would be necessary, it has not provided
evidence on the number of ties that would be needed on the main line. Thus, the number of ties
proposed by NS, which is the only evidence as to the number of transition ties that would be
needed, is accepted. As to the type of transition tie to use, there is no indication that NS’s
proposal is unrealistic. Accordingly, NS’s cost figure for transition ties is used here.

b. Transportation Cost

NS would include costs for transloading steel ties from a barge in Cincinnati and
transporting them to the various ACC construction railheads. Duke explains that it did not
include such costs because its tie vendor indicated that the ties could be shipped to Kenova (on
the ACC) for the same price as shipping to Cincinnati, and thus a separate transloading cost
would not be necessary. Because Duke’s cost evidence for steel ties includes transportation to
ACC railheads, Duke’s evidence on this cost is used here.

c. Tie Spacing

Duke would use the same tie spacing on tangent track and curves, while NS would have
the ACC use reduced tie spacing on curves of greater than 6 degrees. Because steel ties are
relatively new, there is no industry standard on tie spacing, and NS has not demonstrated that the
spacing on steel ties would need to be reduced. Therefore, the analysis here uses Duke’s
evidence on this point.

4. New Rail

The parties agree that the ACC would use 136-pound premium continuous welded rail
(CWR) on main-line track between Kenova and the West Roanoke yard and on curves of 3
degrees or more elsewhere, and that it would use 136-pound standard CWR for all other main-line track. These specifications are used here in conjunction with the miles of track accepted in
Appendix A – ACC Configuration to develop the quantity of each type of track needed.

Duke used a price of $500 per ton for standard CWR and $550 per ton for premium
CWR. NS used a cost figure of $593 per ton for standard CWR and $647 per ton for premium
CWR. NS argues that Duke’s lower unit costs are unrealistic because they are based on
quotations from a small supplier that likely would not be able to supply the quantity needed to
construct the ACC. However, NS has not shown that Duke’s supplier would be any less capable
of supplying rail to the ACC than the supplier that NS used for its price quote. Accordingly,
Duke’s unit cost figures are used here.

5. Relay Rail

The parties agree that the ACC would use 115-pound welded relay rail on branch and
spur lines, and 119-pound jointed relay rail in yards and on set-out tracks. They also agree on the
cost of 115-pound rail. For 119-pound rail, NS would increase Duke’s cost (from $400 per ton
to $475 per ton) to account for transportation costs. However, Duke’s evidence indicates that its
cost estimate included transportation costs. Therefore, Duke’s $400 per ton figure is used
here.

6. Rail Offloading

NS would add separate costs for offloading and distributing rail materials along the ACC
roadbed. However, it is reasonable to assume that a contractor’s quote for installing rail would
include the cost of placing the rail on the ties. Thus, the analysis here does not include a separate
cost for offloading.

7. Field Welds

Duke included a unit cost of $55.25 for field welds. NS contends that Duke’s estimate is
understated because it does not include labor costs. However, the quotation Duke obtained from
the contractor that would install the CWR indicates that the contractor would provide all the
labor to lay the track sections. Thus, Duke’s unit-cost figure for field welds is used here.

8. Joint Bars

Joint bars are required where CWR rail is not used.On opening, Duke did not include
any costs for joint bars in yards or set-out tracks where jointed track would be used; nor did it
explain why joint bars would be unnecessary. NS would include a cost for joint bars. On
rebuttal, Duke recognized the need for joint bars and simply substituted a lower cost for which it
provided no support. Accordingly, NS’s cost estimate for joint bars is used here.

9. Insulated Joints

Insulated joints are required on rails both before and after turnouts and at approximately
3-mile intervals in centralized traffic control (CTC) territory. The parties disagree on both the
cost and number of insulated joints that would be required on the ACC. On opening, Duke used
a cost of $80 each, based on a third-party quotation and, without any support, proposed a quantity
of 100 insulated joints. NS included a cost of $375 per insulated joint, based on a third-party
quotation, and a quantity of 1,808 insulated joints. On rebuttal, Duke increased the number of
insulated joints it would install to 1,374.

Because Duke’s unit-cost estimate is supported by evidence and NS has not shown why
its higher cost should be used, Duke’s unit-cost figure for insulated joints is used here. However,
because the number of insulated joints is dependent on the ACC’s configuration and NS’s
proposed configuration for the ACC is used here, NS’s proposed quantity of insulated joints is
also used.

10. Tie Plates, Spikes, Rail Anchors, and Spring Clips

The parties agree that the ACC would use 6-inch spikes, rail anchors and spring clip
assemblies. They also agree on the use of 4 spikes per tie (2 per plate) and a set of 4 rail anchors
every fifth tie for wood ties in yards and set-out tracks. Duke would have the ACC use 14-inch
tie plates. NS argues that 18-inch tie plates would need to be used. However, NS itself currently
uses 14-inch tie plates; therefore, it would seem reasonable for the ACC to do so as well.
Because NS does not dispute Duke’s cost figures, those figures are used here.

11. Switches

Switches (turnouts) would be required where trains would enter, exit or cross the main-line track, or navigate on yard tracks. The parties agree on the switch specifications, but
disagree on the number of switches that would be required and the unit costs for switches. The
parties’ differing quantities are based on their differing configurations for the ACC. As
discussed in Appendix A – ACC Configuration, NS’s proposed network configuration for the
ACC, with limited modifications, is used here. The switch count used here is based on that
restated network configuration.

Duke’s cost estimates are based on third-party quotations for switches and switch
components. NS also used cost estimates from third-party contractors, but those estimates were
for complete switch packages rather than individual components. NS claims that Duke’s method
of pricing individual components produces an unrealistic estimate of the total cost of switch
installation. However, NS has failed to demonstrate that switch costs cannot be properly
developed from a combination of component parts. Accordingly, Duke’s costs are used in the
restatement here of switch unit costs.

12. Rail Lubrication

While the parties state that they agree on the quantities and costs for rail lubricators, NS’s
cost evidence assumed fewer lubricators than Duke’s (856 versus 875). NS’s evidence can be
viewed as a concession that the ACC would need fewer lubricators. Because the purpose of the
SAC test is to determine the least cost at which the ACC could efficiently construct and operate
its system, NS’s lower-cost evidence is used here.

13. Track Construction (Labor and Equipment)

Duke and NS included $189,745,614 and $207,669,240, respectively, for track
construction costs. The difference in their estimates is due to their differing configurations for
the ACC. Because NS’s proposed basic configuration for the ACC is used here, its unit cost for
track construction costs is also used.

D. Tunnels

The parties agree that the ACC would have 61,209 linear feet of tunnels. Duke would
only provide for single-track tunnels, while NS would double-track 12 of the 63 tunnels on the
ACC. The parties agree to base the cost for single-track tunnels on the $2,561 per LF figure
developed in Coal Trading Corp. v. Baltimore & O.R.R., 6 I.C.C.2d 361, 422 (1990) (Coal
Trading). Using Means, Duke indexed this cost from 1980 to 2002, arriving at a current unit cost
of $5,150 per LF. In contrast, NS used an Association of American Railroads (AAR) index to
inflate the costs from 1978 to 2002, arriving at a current unit cost for single-track tunnels of
$7,223 per LF. However, the cost in Coal Trading was expressed in 1980 dollars, and the
Means construction index is more appropriate for tunnel construction costs than is an AAR
index, which is a more general railroad price index. Therefore, Duke’s figure for single-track
tunnels is used here. However, because NS’s configuration for those portions of the ACC where
tunnels would be required has been accepted, the analysis here assumes that 12 tunnels would
need to be doubled-tracked. As NS’s evidence that the cost of a double-tracked tunnel would be
175% of the cost of a single-track tunnel is the only evidence of record, that percentage is used
here to develop the cost of constructing double-tracked tunnels.

E. Railroad Bridges

Duke and NS offered significantly different estimates for bridge construction. The
difference in their estimates is due to disagreements on the number of bridges, the design of
bridge superstructures and substructures, and certain unit costs for materials. The parties’ cost
estimates and the restatement used here are shown in Table D-5 below.

NS has challenged the number and size of bridges included in Duke’s cost estimates.
Duke generally agrees with NS’s bridge inventory. But Duke argues that NS has understated
the number of bridges that could be replaced with culverts, that NS wrongly assumed that some
bridges would be multi-tracked rather than single-tracked, and that the cost of 60 railroad bridges
over highways should be excluded because NS did not bear the cost of constructing those
bridges.

Because Duke’s proposal to substitute culverts for all existing bridges of less than 20 feet
is rejected (seeCulvert discussion, supra), the analysis here uses NS’s estimate of the number of
bridges. And because NS’s general network configuration for the ACC is used (seeAppendix A
–ACC Configuration), the analysis here uses the multi-tracked bridges proposed by NS.
However, as it is the Board’s policy not to include in a SAC analysis costs that the incumbent
railroad has not itself incurred, the restatement here excludes the costs associated with
constructing the 60 bridges over highways identified by Duke because there is no evidence that
NS, or its predecessors, paid for these bridges.

2. Bridge Design and Unit Costs

The parties’ bridge cost evidence used bridge categorizations based on length. Type I
bridges would be 20-40 LF, Type II bridges would be 40-75 LF, and Type III bridges would be
75-125 LF. As discussed below, the parties disagree on various matters relating to bridge
construction in general, as well as on some matters that relate to specific bridge types.

a. Span Lengths

The parties calculated a slightly different average span length, reflecting the differing
number of NS bridges that they assumed the ACC would replicate. As discussed above, the
analysis here excludes 60 highway bridges that NS would have included, but it includes some
Type I bridges that Duke assumed could be replaced with culverts. Thus, the average bridge span
length used here is based on the restated number of bridges that the ACC would need to provide.

b. Handrails

Duke proposed using 34-inch high handrails, whereas NS would have the ACC use 42-inch handrails based on AREMA standards. Duke argues that AREMA standards are guidelines
rather than requirements and that NS’s own bridges often do not even have handrails.
However, even though AREMA standards are only guidelines, Duke has relied on those
specifications in other aspects of its bridge design. Therefore, it is appropriate to use the 42-inch
handrails specified by AREMA.

c. Steel

The parties agree on the cost for structural steel. But Duke’s workpapers do not show
that it included the cost of reinforcing steel. As NS points out, Duke’s proposed bridges include
concrete abutments, wing walls, and piers—all of which would require reinforcing steel. NS’s
evidence on this cost is thus used here.

d. Cofferdams

Duke initially did not include any costs for cofferdams. In response to NS’s criticism
of this shortcoming, Duke on rebuttal conceded that some cofferdams would be required, but
only on 20% of the piers on Type II and Type III bridges. However, Duke failed to provide for
cofferdams in its case-in-chief and Duke does not demonstrate that NS’s proposal is unrealistic.
Indeed, cofferdams are generally used for underwater construction. Accordingly, NS’s cost
evidence for cofferdams is used here.

e. Rip Rap

Duke included costs for rip rap to protect the wing walls, piers and abutments that would
be constructed on the ACC. Claiming that Duke’s initial rip rap layouts would be insufficient to
protect the wing walls, piers and abutments from washing out, or to protect slopes from erosion
due to storm water runoff, NS provided a higher estimate (approximately $247,900) for rip rap.
On rebuttal, Duke included substantially more investment (approximately $337,900) for rip rap.
Because the parties’ estimates are based on approximately the same amount of wing walls, piers
and abutments, NS’s lower estimate is used, as it is a concession that the ACC could install rip
rap for less than the amount estimated by Duke on rebuttal.

f. Transportation

NS would add costs for transporting materials to the construction sites. Duke claims that
transportation costs are included in the material unit costs it used, but there is no indication in
Duke’s evidence that these costs were included. Therefore, NS’s separate evidence on
transportation costs is used here.

3. Superstructures

a. Type I Bridges

The parties generally agree as to the specifications for Type I bridges, but dispute whether
a separate walkway would be needed for these bridges. Duke notes that AREMA guidelines
allow a minimum 2-foot width gravel shoulder to be used instead of a separate walkway on
ballasted deck bridges. Because Duke’s proposal to use 14-foot-wide bridges meets or exceeds
the AREMA requirements, its evidence is used here.

b. Type II Bridges

The parties disagree on the number of tie hook bolts and the number of guard timbers for
Type II Bridges. Duke’s opening evidence did not include hook bolts. NS would have the ACC
include hook bolts on every bridge timber, allegedly based on AREMA standards. However, a
review of the AREMA guidelines reveals no hook bolt standards. Moreover, as Duke pointed
out on rebuttal, NS’s own standard is to place a hook bolt only at every fifth tie. Duke agrees
that hook bolts should be included, but Duke’s rebuttal evidence would place one on every fourth
timber. Because Duke has shown that NS’s proposed hook bolt quantity is unrealistic, based on
NS’s own practices, Duke’s rebuttal evidence is used here.

Duke initially provided for no guard timbers. NS would place 4" x 8" timber curbing on
one side of the deck. On rebuttal, Duke agreed that guards would be needed and proposed to use
2" x 6" guard timbers placed on both sides of the deck. Because Duke has not shown that NS’s
proposal is unrealistic, NS’s evidence is used here.

c. Type III Bridges

As with Type II bridges, Duke’s placement of hook bolts on every fourth timber and NS’s
use of 4" x 8" timber curbing is accepted for Type III bridges. Also, while the parties differ on
the spacing of girders on Type III bridges, they agree that the AREMA standard is appropriate.
Accordingly, the restatement here uses the AREMA recommendation that girder spacing be 1/15
of the deck span.

4. Bridge Substructures

a. Piles

NS notes that the type of pile proposed by Duke is no longer manufactured; NS has
proposed a substitute pile. Duke assumes that another manufacturer would enter the business
and make those piles for the ACC. But in designing a SARR, the proponent of the design must
show that its proposal is feasible. It is inappropriate to assume that a construction component
that is not actually currently available would nevertheless be available to the SARR.
Accordingly, NS’s pile design is used here.

NS also argues that Duke understated the bearing requirements for each type of bridge,
because the local soil conditions cannot support bridges with the number of piles specified by
Duke. Duke did not respond to this argument. Because Duke has not contested NS’s proposal
for additional piles, NS’s evidence is used here.

b. Abutments

While NS accepts Duke’s abutment types, NS would change the footing design based on
the loads that would be applied to the abutments. Because Duke has not responded to NS’s
argument, NS’s revised abutment cost is used here.

c. Pier Height

Duke calculated pier height as 70% of bridge height, measured from the top of the rail to
the top of the ground or normal water elevation. In contrast, NS would subtract the actual
average superstructure depth from the total bridge height. Because NS’s method, which is based
on the actual measurements of the structures that would be replicated by the ACC, is superior,
that method is used here.

5. Dan River Railroad Bridges

Initially, Duke included no cost for railroad bridges on the Dan River branch. NS would
include $69.5 million for a 5.3-mile open deck trestle bridge, to ensure uninterrupted operations
of the Dan River branch in case of flooding. NS would also include $18 million for three smaller
bridges. On rebuttal, without any explanation or discussion, Duke included $2.4 million for one
bridge.

As discussed above, by locating the Dan River branch line in an area prone to flooding,
Duke must ensure that the shipper located on that line would receive service as reliable as the
service it currently receives from NS, which is not susceptible to service interruption due to
flooding of the Dan River. Accordingly, the SAC analysis assumes that a trestle would need to
be constructed to protect the branch line from flooding. Furthermore, because Duke has not
provided support for its assumption that only a single $2.4 million bridge would be sufficient for
this line, NS’s evidence that three other bridges would be necessary is used here.

F. Signals and Communications

As shown in Table D-6, the parties disagree on the costs of providing a signaling and
communication system.

Table D-6

Signals and Communications

($ millions)

Duke

NS

STB

CTC

$45.05

$55.67

$55.67

Signals in Dark Areas

15.12

14.67

14.67

Failed Equipment Detectors

1.48

1.48

1.48

Slide Fences

0.00

24.80

24.80

Communications

54.72

76.10

58.15

TOTAL*

$116.41

$172.72

$154.77

* Columns may not sum to totals because of rounding.

1. Centralized Traffic Control

The parties agree that the ACC would have CTC on the main lines from Kenova to
Belmont, with a computer-assisted “track warrant control” system on other signaled lines. Duke
and NS agree on the unit costs for CTC, but not on the total costs. NS would have the ACC use
more signals for its double- and triple-track configuration and would place signals in more
locations than would Duke. Because NS’s basic configuration is used here, and because Duke
has not shown that signals would be unnecessary at any of the specific locations identified by NS,
NS’s cost figures for CTC are used here.

2. Signals in Dark Areas

Duke and NS agree on how to estimate costs for signaling in dark territories, but their
cost figures differ due to the differences in their proposed network configuration for the ACC.
Because NS’s proposed configuration is used here, NS’s estimate for signaling in dark areas is
also used.

3. Failed Equipment Detectors

Duke and NS agree on the cost for failed equipment detectors.

4. Slide Fences

Duke did not include a cost for slide fences. NS states that such fences would be needed
in mountainous terrain to detect earth and rock slides. Because Duke has not responded to this
argument, NS’s evidence is used here.

5. Communications

On opening, Duke proposed a satellite-based communication system. However, on
rebuttal, it adopted NS’s proposed microwave-based system, but Duke notes that certain
equipment costs are already reflected as operating expenses and that NS’s proposed tower count
exceeds the number of towers actually on the NS line that the ACC would replicate.

NS’s microwave costs are accepted, but restated to exclude costs for equipment already
included in operating expenses. Also, because Duke’s evidence shows that NS’s proposed tower
count is unrealistic based on NS’s own system, NS’s tower count is restated to comport with the
45 towers actually on the NS lines that the ACC would replicate.

G. Buildings and Facilities

The parties disagree on the costs associated with fueling and waste water treatment
facilities, locomotive and car repair shops, a headquarters building, scales, and yard air and
lighting. Table D-7 below summarizes the parties’ cost estimates and the Board’s restatement.

Table D-7

Facilities

($ millions)

Duke

NS

STB

Fueling Facilities

$9.25

$10.62

$10.54

Wastewater Treatment

0.12

2.08

2.08

Locomotive Shop

3.49

14.05

14.05

Car Repair

0.00

6.71

0.00

Headquarters

1.36

1.86

1.86

MOW & Roadway Bldgs

1.89

7.42

7.42

Scales

0.00

0.90

0.00

Yard Air and Lighting

2.26

2.14

2.14

TOTAL*

$18.36

$45.78

$38.09

* Columns may not sum to totals because of rounding.

1. Fueling Facilities

Duke would locate ACC locomotive fueling facilities at Kenova and West Roanoke, at a
cost of $9.25 million. NS argues that Duke’s estimate is based on a smaller locomotive fleet than
would be needed and therefore understates the scope of fueling. NS estimated a cost of $10.62
million for fueling facilities at these locations. Duke objects to the inclusion of fuel meters,
claiming that other Class I railroads’ fueling facilities do not have meters and that meters would
not be necessary to measure fuel that would be consumed only by ACC locomotives.

The size of fueling facilities is related to the number of locomotives to be fueled.
Because NS’s proposed operating plan and resulting locomotive requirements are used here,
NS’s cost estimate for fueling facilities is used. However, the cost of fuel meters is excluded as
an unnecessary expense, because the ACC would be the only railroad whose locomotives would
use the fueling facilities.

2. Wastewater Treatment

On opening Duke included $110,000 for wastewater treatment, but did not provide any
support for that figure. NS challenged this figure as too low, and has proposed a cost of $2.1
million. On rebuttal, Duke neither contested NS’s evidence nor offered support for its own
figure. Accordingly, NS’s cost estimate is used here.

3. Locomotive Shop

The parties disagree on the building size and equipment necessary for a locomotive shop.
Duke and NS would include $3.49 million and $14.05 million, respectively, for a locomotive
repair facility.

a. Building

Duke would have the ACC build a 47,000-square foot locomotive maintenance and repair
building. This building would be capable of simultaneously handling 16 locomotives for routine
maintenance, with space outside of the building for minor repair of five additional locomotives.
NS argues that the ACC would need a 61,000-square foot shop, plus an additional 3,000-square
foot common area, to accommodate the larger locomotive fleet that it claims the ACC would
need. The appropriate building size is dependent on the locomotive fleet size. Because NS’s
operating plan and its fleet size (restated) are used here, NS’s proposed building size is also used.

Duke’s building cost per square foot was based on third-party quotations. NS relied on
a building cost per square foot based on AREMA standards. Under those standards,
locomotive repair facilities require 44-foot ceilings, whereas Duke’s quotations are for a facility
with only a 24-foot ceiling. At times, engines are removed from locomotives by overhead
cranes; a 24-foot ceiling would not provide enough clearance for such operations. NS’s unit cost
is used here, as it is the unit cost associated with constructing buildings with the required ceiling
height.

b. Equipment

Duke claims that, because the ACC would acquire locomotives under a full-service lease
agreement, it would not need to provide all of the equipment required for locomotive repairs. NS
argues that, even under a full-service lease agreement, the ACC would need to provide the
necessary equipment to service the locomotives. Duke has not provided sample lease agreements
or any other evidence supporting its argument that a contractor would provide much of the
equipment necessary to support the repair facility. Therefore, NS’s estimate for equipment that
the ACC would need to provide at the locomotive repair facility is used here.

4. Car Repair

Duke did not include costs for car repair facilities, arguing that under a full-service lease
repairs would be made by a third-party contractor at the contractor’s facilities. Claiming that
there are no contractor facilities close to the ACC, NS would include $6.7 million to construct
and equip a 26,000-square-foot car repair facility. On rebuttal, Duke supported its initial
evidence by noting that a repair facility is located within a few miles of the ACC. Therefore,
the ACC would not need to build its own repair shop.

5. Headquarters Building

Duke would locate the ACC’s headquarters building at West Roanoke, because of its
central location on the ACC system. The facility would accommodate the ACC’s senior
operating supervisory staff, clerical and dispatching staff, customer service personnel, CTC
control center, and general and administrative staff. This building also would serve as an away-from-home terminal for train crews, as well as the base for the mechanical and MOW personnel
stationed at West Roanoke.

The parties generally agree on the building size and the cost per square foot, but they
disagree on site development costs. Duke estimates the total cost at $1.36 million, while NS
estimates the cost at $1.86 million. NS’s estimate is higher because it includes funds for
insurance, surveys, and other costs that would be incurred before constructing a building.
Because Duke has failed to account for all the necessary costs, NS’s cost estimate is used here.

6. Maintenance-of-Way and Crew Change Buildings

Duke included six roadway crew change buildings at a total cost of $576,355, while NS
included seven buildings at a total cost of $2.2 million. For MOW facilities, based on their
respective MOW plans, Duke included 12 buildings at a total cost of $1,315,059, while NS
included 24 buildings at a total cost of $5.3 million. The differences in the cost estimates are due
not only to the difference in the number of MOW buildings, but also to differences in the square
footage allotment per employee and the cost per square foot to construct these buildings. NS
adjusted Duke’s building size to accommodate NS’s proposed staffing requirements. And while
NS used a cost per square foot that was $2 less than the cost used by Duke on opening, Duke on
rebuttal argued for an even lower cost, claiming that NS had included unnecessary items, such as
paved parking areas.

Because NS’s proposed operating plan (including its MOW plan and requirements) is
used here, its building quantities and its restated square footage requirements are also used. In
addition, NS’s unit costs are used. Duke’s attempt to impeach NS’s proposed unit costs as too
high contradicts the evidence in Duke’s own case-in-chief, which used units costs even higher
than those proposed by NS.

7. Scales

NS asserts that the ACC would require weigh-in-motion scales at Kenova, Celco, and
West Roanoke, at a cost of $300,000 each, including the communications equipment necessary to
transmit the weights to the ACC billing system. However, as Duke notes, industry practice is
to weigh large-volume movements of coal at either origin or destination. Accordingly, the ACC
would not need scales.

8. Yard Air and Lighting

NS would have the ACC place an air system at each end of yards, to expedite train
departure by eliminating the need for locomotives to pressurize a train’s air system. Duke argues
that such systems would not be required, because locomotives attached to the trains would
maintain air pressure for brakes. However, Duke has not shown that a locomotive would be
attached to all sets of cars at all times. Thus, the ACC yards would appear to need an air system.

Duke conceded on rebuttal that yard lighting would be necessary. Without any support,
Duke included a cost of $510,000 for lighting. Because there is no evidence to support Duke’s
estimate, it is rejected. Therefore, NS’s evidence on both yard air and yard lighting is used here.

H. Public Improvements

Table D-8 lists the type of public improvements and associated costs that the parties
estimate would be necessary along the ACC ROW.

Table D-8

Public Improvements

Duke

NS

STB

Fences

$0

$18,358,466

$0

Signs

180,586

1,813,914

180,586

Road Crossing Protection

0

5,470,686

5,470,686

At-Grade Highway Crossings

3,574,174

15,343,988

15,128,667

Grade-Separated Highway Crossings

1,500,000

16,943,653*

16,943,653

Yard Access Roads

1,855,788

1,897,863

1,897,863

TOTAL**

$7,110,548

$56,828,570

$39,621,455

* Includes $3 million that NS inappropriately included in railroad bridges.

** Columns may not sum to totals because of rounding.

1. Fences

Duke inspected about 70% of the NS lines that the ACC would replicate, and it did not
encounter any fencing there. Thus, it did not include any cost for fencing for the ACC. Duke
provided 41 photographs of the tracks along the ACC route, showing that the ROW is not
fenced. NS would include costs to fence approximately 27% of the line, relying on Engrg Rpts
and 16 photographs to show that its ROW is fenced.

While the photographs submitted by NS show random lengths of fencing, they do not
show any railroad track. Moreover, while Engrg Rpts indicates some fencing of the lines that
would be replicated by the ACC, Duke’s line inspection provides a more up-to-date assessment
of current fencing. Because Duke has presented the best evidence of record on this issue, no
fencing costs are included here.

2. Signs

Duke included costs for installation of milepost, whistle post, and flanger signs, as well as
some speed restriction and resume speed signs. NS claims that station and yard signs, as well as
advance warning, additional speed restriction, and resume speed signs would also be necessary
for safe and efficient train operation. NS acknowledges that yard limit, reduce speed, and resume
speed areas are set forth in the railroad operating timetable, but it asserts that a locomotive
engineer would not consult the timetable for speed changes during a trip. On rebuttal, Duke
explained that crews are required to be familiar with conditions on the line over which they
operate before beginning a trip.

While it claims that “standard safety procedure” would require signs at all of the locations
it has specified, NS has offered no support for the extent of the warning signs that it advocates.
Indeed, station signs would not be appropriate because the ACC would have no stations.
Accordingly, Duke’s cost evidence for signs is used here.

3. Road Crossing Protection

Duke included no costs for crossing protection. NS would include crossing protection
costs for those grade crossings included in Engrg Rpts. NS estimates that it incurred 10% of the
cost for crossing protection at those crossings. Because Engrg Rpt indicates that NS’s
predecessor paid for some crossing protection that is still needed today, and NS offers the only
evidence of the extent to which those costs were incurred by the railroad, NS’s crossing
protection cost estimates are used here.

4. At-Grade and Grade-Separated Highway Crossings

a. Lines Replicating Existing NS Route

NS would include costs for all at-grade and grade-separated highway crossings identified
in Engrg Rpts. Duke argues that Engrg Rpts are not helpful in determining whether NS or its
predecessors paid for these crossings, because the rules governing the data collection for those
reports allowed railroads to count the cost of construction even when their contribution to
construction costs might have been minimal or non-existent. However, NS maintains that, even
where the railroad preceded the highway, the railroad was typically responsible for approximately
10% of the cost of the crossing. Accordingly, NS would include in the SAC analysis 10% of the
cost of these highway crossings.

It is reasonable to presume that, where a group of assets are listed in Engrg Rpts, the
existing railroad, or its predecessor, incurred some investment cost. To the extent that such
investment is still necessary for current rail operations, it is appropriate to include those costs in
the SAC analysis. Because NS provided the only crossing cost evidence, its evidence is relied
upon here.

b. Dan River Branch

For the Dan River branch, both parties recognize that both at-grade and grade-separated
crossings would be needed, but neither party provided any support for its cost estimates. Rather,
the costs for such investment simply appear in the electronic spreadsheets of each party. Because
Duke has the burden of proof on this issues and has provided no justification for its cost figures,
NS’s evidence on this issue is used here.

5. Yard Access Roads

Duke and NS included $1,855,788 and $1,897,863, respectively, for yard access roads,
but neither party addressed this cost. Because Duke has failed to meet its burden of establishing
the reasonableness of its evidence, NS’s evidence is used here.

I. Mobilization

Mobilization involves the marshaling and movement of people, equipment, and supplies
to the various construction sites. A mobilization factor is calculated as a percentage of the
construction costs (excluding land, engineering, and contingency costs). Duke only included
funds for initial mobilization, which it estimated at $12.3 million, or 1% of those construction
costs that it claims do not already include such costs. Duke argues that a 1% markup is
sufficient, because the construction bids it used include mobilization and demobilization costs
and Means supports low mobilization costs. Duke notes that in WPL (at 101) a 1.2% markup
was used for mobilization. But that figure was in addition to separate costs for performance
bonds and demobilization that were included in WPL.

NS does not contest using a 1% markup for track, signals and communications, and
buildings and facilities, but NS would apply a higher markup to roadbed preparation, tunnels, and
bridges. NS would also include additional mobilization costs for establishing field offices and
staging areas along the ACC, and, unlike Duke, NS would include costs for demobilization and
performance bonds. NS estimates total mobilization costs (covering initial mobilization,
demobilization, and performance bonds) to be approximately 2.5% of total construction costs (or
$101.2 million).

Duke’s evidence is unacceptable, as it ignores several cost elements (bridge mobilization,
performance bonds, and demobilization) that have been included in prior SAC cases. Because
Duke has failed to meet its burden of establishing the reasonableness of its cost estimate on this
issue, its evidence is rejected, and NS’s 2.5% mobilization factor is used as the best evidence of
record.

J. Engineering

Engineering costs would be incurred to plan, design, and manage the construction of the
ACC. The parties calculated engineering costs as a percentage of most categories of investment
costs (except land). Table D-9 below summarizes the parties’ evidence on this cost.

Table D-9

Engineering Costs

Percentage
of
Investment

Duke

NS

STB

Basic Engineering Services

5.0%

5.7%

4.0%

Planning & Feasibility Studies

0.0%

0.5%

0.0%

Geotechnical Investigation

0.0%

0.7%

0.0%

Construction Management

0.0%

4.3%

4.3%

Resident Inspection

1.8%

1.8%

1.8%

TOTAL

6.8%

13.0%

10.1%

Flat Fee

Location & Design Surveys ($M)

$0.0

$8.3

$0.0

Environmental Permitting ($M)

$0.0

$5.5

$0.0

The parties disagree as to what activities should be encompassed within the basic
engineering services designation. Duke argues that planning and geotechnical studies, as well as
management of the construction project, are part of basic engineering services. Duke notes that
the American Society of Civil Engineers’ Manual 45 lists six standard phases of a construction
project and that five of those six phases (study and report, preliminary design, final design,
bidding or negotiating, and construction) are factored into the estimates of basic engineering
services in the references upon which Duke relied. NS asserts that basic engineering services do
not include planning/feasibility studies, location and design surveys, and geotechnical subsurface
investigations. However, NS has provided no support for that assertion. Therefore, Duke’s
evidence that basic engineering services include planning, surveys, and geotechnical studies is
relied upon here.

The major difference between the parties’ basic engineering services percentages stems
from their differing characterizations of the complexity of the ACC construction. NS asserts that
all of the ACC’s construction would be above average in difficulty. Duke, however, notes that
the American Consulting Engineers Council of Pennsylvania designates bridge and tunnel
construction as “above-average” in complexity but railway construction otherwise as only
“average” in complexity. As Duke points out, less than one-third of the ACC’s construction
would involve bridges and tunnels and Duke’s proposed engineering factor takes that into
account. Because Duke has supported its evidence on this point, Duke’s evidence is relied upon
here.

The remaining dispute centers on whether the ACC would use a construction
management firm to oversee the project. As Duke recognizes, the use of such firms has been the
standard practice for large modern construction projects for some 40 years. Nevertheless, Duke
argues that, because the original NS lines were likely built without the services of a management
construction firm, such a cost should not be included in a SAC analysis. However, much of the
modern construction process relies on an entity being responsible for overseeing all aspects of the
project. As NS points out, Duke assumes that the ACC could be constructed in a 16-month
period. Such an expedited process would require careful coordination and oversight. Thus, it is
reasonable to include this expense as a modern construction practice.

Because NS has provided the only independent evidence on the cost of a management
construction firm’s services, its 4.3% factor is used here. However, so as to ensure that there is
no possibility of a double count of construction management costs, Duke’s 5% basic engineering
factor is reduced to 4%.

Finally, NS argues that location and design surveys, as well as environmental permitting,
should be added to the engineering costs. Such costs appear to be unnecessary. NS has not
explained why the cost of surveys is not captured in the study and design phases that are
specifically included in the basic engineering estimates used by Duke. Furthermore, it is contrary
to SAC principles to include costs for environmental permitting where such costs have not been
incurred by the defendant railroad or its predecessors when its original rail system was built.

In sum, the engineering factor used here for the ACC is 10.1% (4% for basic
engineering, 1.8% for resident inspection, and 4.3% for construction management). This
figure comports with the percentages used in prior SAC cases.

Duke argues that modern engineering practice (project management software and risk
management techniques), barrier-to-entry considerations, and obtaining contractor construction
bids in advance would all reduce the amount of the contingency costs that would be appropriate.
However, Duke has not shown that project management software and risk management
techniques would reduce the risk of contingencies on the ACC. Also, Duke’s argument that the
risk of late delivery of materials of equipment should be ignored in SAC cases is misplaced. The
assumption in SAC cases that scarcities would not be a concern (i.e., that the massive numbers of
workers, materials, and equipment needed to build a railroad would be available) does not mean
that the SARR would be immune from the risk of late arrival of materials or equipment, a normal
occurrence in all business transactions. Duke’s argument that advance construction bids would
reduce the risk of contingencies must be rejected, because substantial cost overruns can occur
after construction bids are approved. Finally, Duke cannot assume that the risk factor, and in
turn the contingency costs, would be lower because the new entrant would be the beneficiary of
building on an existing route. The SAC analysis does not assume any cost advantage from
replicating the incumbent carrier’s existing plant. Accordingly, as in prior cases, a 10%
contingency factor is used.

L. Off-System Investment

As discussed in the body of the decision, the off-SARR rerouting proposed by Duke
generally has been rejected. Accordingly, the dispute as to whether the residual NS system
would need additional investment to carry the rerouted traffic that it would receive in interchange
from the ACC is moot. Thus, no off-system investment costs are included here.